News Archives: February, 2018
The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing" reports yesterday. Their numbers confirm a sharp drop in money fund assets in January, following jumps in December and November and a dip in October. ICI's "January 2018 - Trends" shows a $47.8 billion decrease in money market fund assets in January to $2.800 trillion. This follows a $51.8 billion increase in December, a $57.9 billion increase in November, a $8.8 billion decrease in October, a $28.8 billion increase in Sept., and a $71.8 billion increase in August. In the 12 months through January 31, money fund assets have increased by $118.0 billion, or 4.4%. We review ICI's latest reports below, and we also quote the lone mention of money funds in Fidelity's "2017 Annual Shareholder Update".
ICI's monthly report states, "The combined assets of the nation's mutual funds increased by $576.21 billion, or 3.1 percent, to $19.32 trillion in January, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."
It explains, "Bond funds had an inflow of $47.05 billion in January, compared with an inflow of $13.42 billion in December.... Money market funds had an outflow of $50.89 billion in January, compared with an inflow of $49.40 billion in December. In January funds offered primarily to institutions had an outflow of $41.92 billion and funds offered primarily to individuals had an outflow of $8.97 billion."
The latest "Trends" shows that Taxable MMF assets fell but Tax Exempt MMF rose last month. Taxable MMFs decreased by $54.1 billion in January, after increasing by $49.3 billion in December and $57.4 billion in November. They decreased $9.4 billion in October, but increased $30.1 billion in September and $73.5 billion in August. Tax-Exempt MMFs increased $6.3 billion in January, after increasing $2.5 billion in December, $0.5 billion in November and $0.9 billion in October. Tax-exempt MMFs decreased $1.3 billion in September. Over the past year through 1/31/18, Taxable MMF assets increased by $111.0 billion (4.4%) while Tax-Exempt funds rose by $7.0 billion over the past year (5.4%).
Money funds now represent 14.5% (down from 15.2% the previous month) of all mutual fund assets, while bond funds represent 21.2%, according to ICI. The total number of money market funds decreased by 2 to 380 in January, down from 420 a year ago. (Taxable money funds fell by 1 to 298 and Tax-exempt money funds were down one to 82 over the last month.)
ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed a plunge in Repo and a jump in CDs in January. Repo remained the largest portfolio segment, but it was down $63.8 billion, or -6.7%, to $892.5 billion or 33.5% of holdings. Repo has increased by $126.9 billion over the past 12 months, or 16.6%. (See also our Feb. 12 News, "Feb. Money Fund Portfolio Holdings: TD, CP, CDs Jump; Repo Plummets.")
Treasury Bills & Securities remained in second place among composition segments; they fell by $6.5 billion, or -0.9%, to $695.6 billion, or 26.1% of holdings. Treasury holdings have fallen by $64.2 billion, or -8.5%, over the past year. U.S. Government Agency Securities remained in third place; they rose by $25.2 billion, or 3.7%, to $707.7 billion, or 26.6% of holdings. Agency holdings have fallen by $6.3 billion, or -0.9%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they increased $21.2 billion, or 11.9%, to $199.9 billion (7.5% of assets). CDs held by money funds have risen by $26.6 billion, or 15.3%, over 12 months. Commercial Paper remained in fifth place, increasing $15.4B, or 10.4%, to $163.6 billion (6.1% of assets). CP has increased by $52.8 billion, or 47.6%, over one year. Notes (including Corporate and Bank) were down by $1.1 billion, or -14.8%, to $6.3 billion (0.2% of assets), and Other holdings decreased to $4.1 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 4.15 million to 31.035 million, while the Number of Funds declined by 2 to 298. Over the past 12 months, the number of accounts rose by 5.811 million and the number of funds decreased by 21. The Average Maturity of Portfolios was 30 days in December, down 2 days from December. Over the past 12 months, WAMs of Taxable money funds have shortened by 12 days.
In other news, Fidelity Investments' just-released "2017 Annual Shareholder Update" barely mentions money funds this year. The report says, "Fidelity's active investment-grade bond funds continued to provide shareholders with strong risk-adjusted performance in 2017, outperforming their benchmarks on an aggregate basis and topping 72%, 76%, and 76% of their peers over the trailing one-, three-, and five-year periods. With Fidelity's equity and bond funds providing solid building blocks, asset-allocation funds also outperformed. For example, following enhancements to Fidelity's target date product line in recent years, the flagship actively managed target date Fidelity Freedom Funds beat 92%, 93%, and 78% of their peers for the trailing one-, three-, and five year periods. In addition, Fidelity's money market funds continued to provide shareholders with stability, liquidity, and competitive yields for their short-term cash holdings."
According to a table, Fidelity's Money Market Funds outperformed 81% of their peers over 1 year, 84% of their peers over 3 years, and 82% of their peers over 5 years. (The table says they use Lipper data and describes it as "Weighted % of peers outperformed.")
Online money market fund trading "portal" Institutional Cash Distributors released its "2018 ICD Client Survey" results, which summarize feedback from some of the largest companies in the world on money market funds, repatriation and a number of cash investment issues. A press release entitled, "Corporate Treasury Trends Revealed in ICD's 2018 Client Survey Results," explains, "Survey highlights include: 63% of U.S. respondents plan to repatriate cash in 2018; 42% of U.S. respondents are invested in U.S. Prime MMFs, projected to grow to 63% by the end of 2018; 19% of global respondents plan on changing or adding a Treasury Management System (TMS) over the next 12 months; and, 99% of global respondents rated ICD's Customer Service as excellent or above average, with the vast majority giving a rating of excellent." (`Note: We'd like to invite any clients or fund managers attending the "ICD Roadshow" in LA on March 22 to stop by our Bond Fund Symposium the morning before or the day after ICD's event and to encourage those attending BFS to make hotel reservations ASAP. Crane's Bond Fund Symposium takes place nearby at The LA InterContinental Downtown, March 22nd and 23rd.)
The press release explains, "Institutional Cash Distributors (ICD), the world's largest independent institutional investment portal with aggregate client balances totaling $120 billion, today released its 2018 ICD Client Survey Results. Surveys were sent to each of ICD's 300+ clients with 143 providing responses. When asked about repatriation, nearly two-thirds of U.S. respondents said they will repatriate cash to the U.S. in 2018, with half doing so in Q2. ICD clients include many of the world's largest companies, including seven of the top eleven S&P 500 Index companies ranked by overseas cash balances."
ICD Co-Founder and Managing Director Tom Newton comments, "Understanding our clients' repatriation timing is important to ensure investment supply is available to meet demand. We are beginning to see the first wave of repatriated investments coming in and are preparing for increased demand in Q2." (Year-to-date in 2018, offshore USD assets have increased by $19 billion to $445 billion, after increasing by $27 billion in 2017, according to Crane's Money Fund Intelligence International.)
ICD's release continues, "Many of the respondents plan to considerably widen their investment portfolio in 2018, with U.S. Prime MMF investors expecting to increase from 42% to 63% in 2018. Globally, Short Duration Bond Funds are expected to see the most growth in 2018, followed by Time Deposits, U.S. Treasuries, U.S. Agencies and Commercial Paper."
Co-Founder and Managing Director Jeff Jellison explains, "We lead the industry in U.S. Prime MMF Reform solutions, which enables many of our clients to invest in U.S. Prime MMFs. We are encouraged to see that many more will be taking advantage of the higher yields associated with Prime MMFs in 2018."
The release explains, "ICD's 2018 Client Survey also revealed significant client activity regarding upgrading TMS systems with 19% of survey respondents indicating their intent to change or add a TMS over the next 12 months. The survey shows the most widely used TMS platforms are Kyriba, ION (Reval, Wall Street Systems and Treasura), Logotech, FIS, SAP and GTreasury. ICD has a dedicated technology team that focuses on creating, maintaining and enhancing integrations with TMS and ERP systems, clearing and custody firms, transfer agents, fund companies, data providers, electronic trading platforms, analytics applications and banks." (TMS stands for Treasury Management System.)
It adds, "The Client Survey confirms ICD's commitment to customer service with 99% of respondents rating ICD customer service as excellent or above average, with the vast majority giving a rating of excellent."
Ed Baldry, ICD Co-Founder and Global Head of Sales, tells us, "We expect to further increase our competitive advantages with Parthenon Capital Partner's recent growth investment in ICD. We've added several customer service and technology specialists to the team and we will add many more over the coming months in our ongoing mission to provide superior technology and extraordinary customer service." (See our Oct. 16, 2017 News, "ICD Releases Treasury Options Paper, Announces Parthenon Investment.")
In other news, J.P. Morgan Securities recently published its latest "Taxable money market fund holdings update." They comment, "January MMF holdings reports show a significant reversal in repo exposures following year-end. Repo balances with MMFs increased $150bn to $874bn month over month, while Fed RRP balances fell $231bn.... Not surprisingly, much of the increase was driven by French banks, which saw their exposures grow by $109bn month over month. As of January month-end, MMF repo exposures to French banks stood at $228bn, the third highest month on record. French repo exposures in MMFs were highest in November 2017 at $252bn, followed by October 2017 at $245bn. Separately, repo cleared through FICC fell by $13bn month-over-month, and as of January month-end stood at $21bn."
The update tells us, "Government MMFs rotated their exposures out of RRP and Treasury/Agency coupons and floaters, and into repo, bills, and discos. Month over month, their RRP balances declined by $180bn, while their repo exposures increased by $150bn. Said another way, 83% of MMFs' RRP balances went back into repo.... This is slightly lower than last January at 93% as well as lower than other months immediately following quarter-ends. The remainder seemed to have rotated out of RRP and into bills and discos as balances increased by $37bn and $27bn, respectively. This makes sense as the curve between overnight repo and 3m term bills/discos steepened to 13bp, the highest we've seen post quarter-ends over the past year."
Finally, JPM adds, "Prime MMFs' exposure to Yankee banks increased by $15bn, with much of the increase attributable to CDs and time deposits.... Again, French banks drove the rise in balances, followed by banks domiciled in the Netherlands and Sweden. Interestingly, nearly all other non-European banks saw their exposures decline in prime MMFs." (See also our Feb. 12 News, "Feb. Money Fund Portfolio Holdings: TD, CP, CDs Jump; Repo Plummets.")
Federated Investors released its latest "10-K annual report late last week, which discusses a number of theoretical risks to their business. Given Federated's huge role in the money market fund space, the document provides a glimpse into a number of issues impacting money market funds in general. We except from their 10-K below. (See also our Jan. 29 News, "`Federated's Donahue, Cunningham Optimistic on MMF Growth in 2018," which quotes from Federated's most recent quarterly earnings call.) Federated writes in their filing, "Deregulation also is a focus of certain legislative efforts. The House Financial Services Committee recently advanced a bill seeking to reverse certain aspects of money market fund reform. For example, the proposed law would permit the use of amortized cost valuation by, and override the floating NAV and certain other requirements for, institutional and municipal (or tax-exempt) money market funds, which requirements were imposed under the SEC's structural, operational and other money market fund reforms adopted through amendments to Rule 2a-7, and certain other regulations, on July 23, 2014 (2014 Money Fund Rules) and related guidance (collectively, the 2014 Money Fund Rules and Guidance)."
They explain, "The current regulatory environment has impacted, and will continue to impact, Federated's business, results of operations, financial condition and/or cash flows. For example, changes required under the 2014 Money Fund Rules and Guidance resulted in a shift in asset mix from institutional prime and municipal (or tax-exempt) money market funds to stable NAV government money market funds across the investment management industry and at Federated, which impacted its AUM, revenues and operating income. While management believes that, as interest rates rise, money market funds will benefit generally from increased yields, particularly as compared to deposit account alternatives, and that, as spreads widen, investors who exited prime money market funds will likely continue to reconsider their investment options over time, including Federated's prime private money market fund and prime collective fund, the degree of improvement to Federated's prime money market business can vary and is uncertain."
The 10-K says, "Management believes that the floating NAV, and fees and gates, required by the 2014 Money Fund Rules, as well as the Final Fiduciary Rule and other Regulatory Developments, has been and will continue to be detrimental to Federated's fund business. In addition to the impact on Federated's AUM, revenues, operating income and other aspects of Federated's business described above, on a cumulative basis, Federated's regulatory, product development and restructuring, and other efforts in response to the Regulatory Developments discussed above, including the internal and external resources dedicated to such efforts, have had, and may continue to have, a material impact on Federated's expenses and, in turn, financial performance."
It continues, "As of December 31, 2017, given the current regulatory environment, the possibility of future additional or modified regulation or oversight, and the potential for deregulation in the U.S., Federated is unable to fully assess the impact of adopted or proposed regulations, and other Regulatory Developments, and Federated's efforts related thereto, on its business, results of operations, financial condition and/or cash flows. The regulatory changes and developments in the current regulatory environment, and Federated's efforts in responding to them, could have a material and adverse effect on Federated's business, results of operations, financial condition and/or cash flows."
The filing also states, "On April 5, 2017, European Parliament passed EU money market fund reforms (Money Market Fund Regulation or MMFR), which went into force on July 21, 2017. The MMFR provides for the following types of money market funds in the EU: (1) Government constant NAV (CNAV) funds; (2) Low volatility NAV (LVNAV) funds; (3) Short-term variable NAV (VNAV) funds; and (4) standard VNAV funds. The reforms will be effective (i.e., must be complied with) in regards to new funds on July 21, 2018 and will be effective in regards to existing funds on January 21, 2019. Federated continues to engage with trade associations and appropriate regulators in connection with the MMFR as the European Securities Market Authority (ESMA) and the European Commission begin work on the next stage of implementing the MMFR."
The document tells us, "While the MMFR will need to be complied with in 2018 or early 2019, government CNAV and LVNAV fund reforms will be subject to a future review by the European Commission in 2022. This review will consider the adequacy of the reforms from a prudential and economic perspective, taking into account, among other factors, the impact of the reforms on investors, money market funds, money fund managers and short-term financing markets, the role that money market funds play in purchasing debt issued or guaranteed by EU Member States, and international regulatory developments…. [I]t is uncertain whether Brexit could delay implementation of the EU money market fund reforms. For Federated money market fund products subject to the MMFR, Federated has begun to take steps to structure such products consistent with the MMFR."
The Pittsburgh-based company writes on the "Potential Adverse Effects of Low Short-Term Interest Rates," "After initiating short-term interest rate increases of 0.25% in late 2015 and 2016, the Federal Open Market Committee of the Federal Reserve Board (FOMC) raised the federal funds target rate by 0.25% three times during 2017 to its current target range of 1.25%-1.50%. The federal funds target rate, which drives short-term interest rates, had been close to zero for nearly seven years prior to the December 2015 increase. The long-term low interest-rate environment resulted in the gross yield earned by certain money market funds not being sufficient to cover all of the fund's operating expenses. As a result, beginning in the fourth quarter of 2008, Federated implemented voluntary waivers (either through fee waivers or reimbursements or assumptions of expenses) in order for certain money market funds to maintain positive or zero net yields (Voluntary Yield-related Fee Waivers). These waivers were partially offset by related reductions in distribution expense and net income attributable to noncontrolling interests as a result of Federated's mutual understanding and agreement with third-party intermediaries to share the impact of the Voluntary Yield-related Fee Waivers."
They also comment, "On a cumulative basis, Federated's regulatory, product development and restructuring, and other efforts in response to the Regulatory Developments discussed above, including the internal and external resources dedicated to such efforts, have had, and may continue to have, a material impact on Federated's expenses and, in turn, financial performance. The floating NAV for institutional and municipal (or tax-exempt) money market funds, and redemption fees and liquidity gates, required by the 2014 Money Fund Rules and Guidance, effective October 14, 2016, resulted in a shift in asset mix from institutional prime and municipal (or tax-exempt) money market funds to stable NAV government money market funds across the investment management industry and at Federated, which impacted its AUM, revenues and operating income. The regulatory changes and developments in the current regulatory environment, and Federated's efforts in responding to them, could have a material and adverse effect on Federated's business, results of operations, financial condition and/or cash flows. Given the current regulatory environment and the potential for deregulation or future additional or modified regulation or guidance, Federated is unable to fully assess the degree of the impact of adopted or proposed regulations, and other regulatory developments, and Federated's efforts related thereto, on its business, results of operations, financial condition and/or cash flows."
The 10-K also says, "Outside of the U.S., international regulators and other authorities, such as the FCA and Central Bank of Ireland, also have adopted and proposed regulations that could increase Federated's operating expenses and adversely affect Federated's business, results of operation, financial condition and/or cash flows.... Management continues to monitor and evaluate the potential impact of European money market reforms and other regulatory developments on Federated's business, results of operations, financial condition and/or cash flows. Regulatory reforms stemming from Brexit, as well as the potential political and economic uncertainty surrounding Brexit or other initiatives also may adversely affect, potentially in a material way, Federated's business, results of operations, financial condition and/or cash flows (including to Federated's non-U.S. operations)…. Among other potential impacts, compliance risks, the cost of compliance and other operational expenses have increased, and may continue to increase, it may become more difficult to passport products between the UK and EU Member States, and certain money market fund products may become less attractive to institutional or other investors, which could result in changes in asset mix and reductions in AUM, revenues and operating income."
It continues, "The designation as a non-bank, non-insurance company global systemically important financial institution by the FSB also could have a material adverse effect on Federated's business, results of operations, financial condition and/or cash flows <b:>`_…. Among other potential impacts, any such designation would subject the designated entity to enhanced banking-oriented measures, including, for example, capital and liquidity requirements, leverage limits, enhanced public disclosures and risk management requirements, thereby increasing compliance risk and compliance costs. Federated is unable to assess the degree of any potential impact that Brexit, European money market reforms, an FTT or other regulatory reforms or initiatives may have on its business, results of operations, financial condition and/or cash flows until negotiations for the UK's exit are completed, such regulatory developments receive final approval and become effective or an FTT is enacted. `Federated also is unable to assess whether, or the degree to which Federated, any of its investment management subsidiaries or any of the Federated Funds, including money market funds, or any of its other products, could ultimately be determined to be a non-bank, non-insurance company global systemically important financial institution at this time."
Regarding "Risk of Federated's Money Market Products' Ability to Maintain a Stable Net Asset Value," Federated writes, "Approximately 41% of Federated's total revenue for 2017 was attributable to money market assets. An investment in money market funds is neither insured nor guaranteed by the FDIC or any other government agency. Federated's retail and government money market funds, as well as its private and collective money market funds, seek to maintain a stable NAV. Although stable NAV money market funds seek to maintain an NAV of $1.00 per share, it is possible for an investor to lose money by investing in these funds. Federated also offers institutional prime or municipal (or tax-exempt) money market funds which transact at a fluctuating NAV that uses four-decimal-place precision ($1.0000). It is possible for an investor to lose money by investing in these funds."
They continue, "Federated devotes substantial resources, such as significant credit analysis and attention to security valuation in connection with the management of its products and strategies. However, the NAV of an institutional prime or municipal (or tax-exempt) money market fund can fluctuate, and there is no guarantee that a government or retail (i.e. stable NAV) money market fund will be able to preserve a stable NAV in the future. Market conditions could lead to a limited supply of money market securities and severe liquidity issues and/or declines in interest rates or additional prolonged periods of low yields in money market products or strategies, and regulatory changes or developments could lead to shifts in asset levels and mix, which could impact money market fund NAVs and performance. If the NAV of a Federated stable NAV money market fund were to decline to less than $1.00 per share, such Federated money market fund would likely experience significant redemptions, resulting in reductions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated's business, results of operations, financial condition and/or cash flows. It is also possible that, if an institutional prime or municipal (or tax-exempt) money market fund's fluctuating NAV consistently or significantly declines to less than $1.0000 per share, such Federated money market fund could experience significant redemptions, resulting in reductions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated's business, results of operations, financial condition and/or cash flows."
Finally, the document comments briefly on Federated's relationship with brokerage Edwards Jones, saying, "In addition to the VIEs in the table above, at December 31, 2016, Federated had a majority interest (50.5%) and acted as the general partner in Passport Research Ltd. (Passport), a limited partnership. Edward D. Jones & Co., L.P. was the limited partner with a 49.5% interest. The partnership was an investment advisor to one sponsored fund as of December 31, 2016 and was deemed to be a VIE in accordance with the consolidation guidance. Federated transferred its partnership interest on January 27, 2017 and is no longer the primary beneficiary of Passport."
Money fund assets rose for the third week in a row to their highest levels since May 2010, and they're poised to break the $2.85 trillion level, according to the Investment Company Institute's latest "Money Market Fund Assets" report. ICI writes, "Total money market fund assets increased by $15.63 billion to $2.84 trillion for the week ended Wednesday, February 21. Among taxable money market funds, government funds increased by $13.26 billion and prime funds increased by $2.08 billion. Tax-exempt money market funds increased by $279 million." Total Government MMF assets, which include Treasury funds too, stand at $2.241 trillion (78.8% of all money funds), while Total Prime MMFs stand at $465.3 billion (16.4%). Tax Exempt MMFs total $138.0 billion, or 4.9%. We review ICI's latest below, and also quote from recent comments from RBC Capital Markets' Mike Cloherty on "repatriation".
ICI's weekly press release explains, "Assets of retail money market funds increased by $2.22 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $160 million to $618.50 billion, prime money market fund assets increased by $1.57 billion to $264.75 billion, and tax-exempt fund assets increased by $489 million to $131.28 billion." Retail assets, which are at their highest levels in 2 years, account for over a third of total assets, or 35.7%, and Government Retail assets make up 61.0% of all Retail MMFs.
It adds, "Assets of institutional money market funds increased by $13.41 billion to $1.83 trillion. Among institutional funds, government money market fund assets increased by $13.10 billion to $1.62 trillion, prime money market fund assets increased by $519 million to $200.54 billion, and tax-exempt fund assets decreased by $210 million to $6.96 billion." Institutional assets account for 64.3% of all MMF assets, with Government Inst assets making up 88.7% of all Institutional MMFs.
In possibly related news, RBC Capital Markets' Michael Cloherty writes again on "repatriation" yesterday in his latest, "US Interest Rate Focus." He explains, "For nearly two years we have been preaching that repatriation would have profound effects on the front end of the US curve. However, with LIBOR/OIS priced to hit 36.5 bps into the middle of the year, we don't think there is much room for LIBOR/OIS to move beyond that level. Many corporations that are bringing overseas cash home are likely to park the money in very short investments until the money is returned to shareholders, used for M&A, invested in a new plant, used to pay down debt, etc."
Cloherty tells us, "Normally, we would expect that cash to be invested in Government MMF (or invested in the same assets a Government MMF would buy). But if spreads were wide enough, that cash would likely be invested in Prime MMF (or directly invested in CP, CDs, etc). In 2016, offshore corporate cash seemed to be an aggressive CP/CD dip buyer once L/OIS moved into the 40s. That potential for an investment shift will serve as a ceiling on how cheap LIBOR can get."
He writes, "In general, we caution against underestimating the impact of repatriation. Almost three trillion dollars that is mostly invested in 0- to 3-year USD fixed income is likely to shift to an equity-heavy preferred investment profile. Swings of that size always create market stress. However, while we have spent nearly two years warning about higher LIBOR due to repatriation, we think that forward LIBOR/OIS spreads are starting to approach the peaks."
The RBC piece comments, "An extremely simplified look at the mechanics of how repatriation impacts LIBOR is: Company has its offshore cash invested in a $48 billion portfolio of 2yr bank floaters, with 1/24th of the book maturing each month for the next two years. Company decides to use that cash to buy back its stock (or do M&A, etc). But its minimum threshold for stock buybacks is $12bn increments. Company does not want to sell bonds from its portfolio, as any losses on those sales would flow through to quarterly earnings. So it slowly matures away its portfolio, and stuffs the cash in a government MMF (or directly in the assets that a government MMF would buy) until it hits the $12bn balance needed to trigger a stock buyback." This creates a saw-tooth pattern in its government MMF holdings."
They state, "As bank bonds mature, banks find that the demand for 2yr floaters has dropped dramatically, so they need to seek financing in other parts of the curve. The rise in reliance on CP/CD financing drives up LIBOR. If LIBOR rises enough, the corporation stops parking its maturing holdings in a government MMF -- it starts putting that cash into the CP/CD market. LIBOR stops rising."
Finally, they add, "Note that when MMF reform drove up LIBOR in 2016, offshore corporate cash seemed to be one of the aggressive dip buyers. We think LIBOR/OIS near 40bps would cause a meaningful shift into CP/CD. Eventually the corporation has spent all of its repatriated cash, and it no longer provides any support to the CP/CD markets. But that will take a couple of years, giving issuers time to find a more stable investor base."
U.K.-based website Treasury Today recently wrote the article, "Euro LVNAV MMFs hang in the balance," which discusses the recent move by the European Union to ban "reverse distribution mechanisms." Treasury Today comments, "The ability for fund managers to offer euro-denominated Low Volatility Net Asset Value (LVNAV) money market funds is in doubt. This comes after the European Commission (EC) stated that fund managers would no longer be able to use share cancellation mechanisms under the new regulatory regime that applies to new funds from 21st July 2018 and existing funds from 21st January 2019." (See our Feb. 5 News, "EC Letter Bans Reverse Exchanges in New European Money Fund Regs.") We quote from their update below, and we also summarize our latest Weekly Money Fund Portfolio Holdings statistics.
They explain, "Share cancellation is a technique used by fund managers that offer constant net asset value (CNAV) funds. It allows them to maintain a share price of E1 in a negative interest rate environment - one of the most appealing features of the funds for investors."
The update tells us, "With the usage of this mechanism now outlawed, euro LVNAV funds – which the majority of euro CNAV funds were going to transition to – will not be viable in a negative interest rate environment. Because of this, fund managers offering euro CNAV funds will have little option but to convert to variable net asset value (VNAV) money market funds, impacting E100bn of assets under management. This would not be the case if short-term interest rates turned positive to the extent that they could deliver positive yields."
It adds, "That being said, Aviva Investors has been offering VNAV funds since 2008 and has had success marketing this product to corporates. "The collapse of Lehman Brothers and the run on Northern Rock, almost a decade ago, systematically changed the environment for stable net asset value money market funds," explains Matthew Tatnell, Head of Liquidity at Aviva Investors."
He tells the publication, "Corporate investors that once considered cash investments as a risk-free asset class could no longer do so. In 2008 we took a bold decision to change our stable net asset funds from CNAV to VNAV but continued to target a stable net asset value. This was the right decision for our investors and we have continued to deliver a stable net asset fund."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary yesterday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection, and the latest cut (with data as of Feb. 16) includes Holdings information from 67 money funds, representing $1.326 trillion of the $2.990 (44.3%) in total money fund assets tracked by Crane Data. (For our monthly Holdings recap, see our Feb. 12 News, "Feb. Money Fund Portfolio Holdings: TD, CP, CDs Jump; Repo Plummets.")
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $448.2 billion, or 36.8%, Treasury debt totaling $401.1 billion or 30.3%, and Government Agency securities totaling $280.5 billion, or 21.2%. Commercial Paper (CP) totaled $48.2 billion, or 3.6%, and Certificates of Deposit (CDs) totaled $42.0 billion, or 3.2%. A total of $33.9 billion or 2.6%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $32.1 billion, or 2.4%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $401.1 billion, Federal Home Loan Bank with $220.6 billion, BNP Paribas with $68.3 billion, Nomura with $36.2 billion, Federal Farm Credit Bank with $35.7 billion, RBC with $33.8 billion, Wells Fargo with $31.7 billion, Credit Agricole with $30.3 billion, Societe Generale with $26.0 billion, and Natixis with $23.8 billion.
The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($137.5B), Fidelity Inv MM: Govt Port ($103.4B), BlackRock Lq FedFund ($91.6B), Goldman Sachs FS Govt ($88.5B), Wells Fargo Govt MMkt ($72.2B), Blackrock Lq T-Fund ($69.1B), Dreyfus Govt Cash Mgmt ($65.6B), State Street Inst US Govt ($48.5B), Morgan Stanley Inst Liq Govt ($48.3B), and Goldman Sachs FS Trs Instruments ($45.7B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
This month, MFI interviews Morgan Stanley Investment Management Managing Directors and Co-Heads of Global Liquidity Fred McMullen and Jonas Kolk. MSIM is the 5th largest manager of global institutional money funds, overseeing $169.0 billion. We discuss the latest issues involving U.S. money market funds, and also talk about pending European money fund reforms, the state of conservative ultra-short bond funds, and a number of other issues in the cash investment space. Our Q&A follows. (Note: This interview is reprinted from the February issue of our flagship Money Fund Intelligence newsletter; contact us at inquiry@cranedata.com to request the full issue.)
MFI: Tell us about your history. McMullen: The genesis of the business was designed for our brokerage and private wealth platforms. In the early 2000s, we made a push into the institutional funds market, both in the U.S. and offshore. Then for our ultrashort fund, which is approaching its two-year anniversary, that history coincides with the recent regulatory changes here in the U.S.... I joined Morgan Stanley in 2010 and took over the distribution and product functions in 2011. I've been in the industry about 30 years. Kolk: We launched our first money fund in 1975, so it was one of the first funds in existence in the industry.... I joined 14 years ago [and] was hired as someone with experience on the institutional side of portfolio management.
MFI: What's your biggest priority now? McMullen: We have a lineup of U.S. institutional funds and retail funds in both the taxable and tax-exempt spaces, and we also have our offshore funds across three major currencies -- U.S. dollar, euro and sterling. The money market funds are complemented by our Ultra Short Income Bond Fund [where] the AUM is a little over $7 billion.... We also manage liquidity separate accounts.
I would say that EU money market fund reform is right on top of our priorities list, and where we're spending a lot of time engaging clients and firming up our product line decisions. On the offshore side, we've experienced a lot of growth.... [We're now] number six in the offshore league tables, so we want to preserve this part of the franchise as much as we can. In terms of our response to the EU regulations, we're finalizing what our product lineup will look like.... We think there's a lot of meaningful demand for the low volatility NAV (LVNAV) option, as well as the public debt CNAV fund structure, and we're trying to get a handle on if there is really scalable demand for the floating NAV option at this point. We don't see a lot of it yet, but we're doubling down on our client engagement there.
The other priority is client engagement in the U.S. following the regulatory reform. There are a lot of cash managers rethinking their investment options, given the different market environment we're in now [with] interest rates moving meaningfully higher. They want to potentially diversify their government and their deposit holdings.... We have a lot of clients that are rethinking prime funds -- that's obviously a hot topic in our market -- and also looking at the ultra-short bond fund category.... [In addition], they're focused on deposit betas as rates continue to rise.
Another priority for us is just diversifying the business further. The ultrashort funds have been a lot of help in that regard, and we're working on a number of product development opportunities. We're also developing our online capabilities. Our online platform leverages Cachematrix technology. The nice thing is it allows us to broaden our liquidity fund offerings beyond the Morgan Stanley funds. This is something that we're increasingly focused on as we move through '18 and beyond.
MFI: What's your biggest challenge? Kolk: We have an overriding philosophy of opportunistic portfolio management, but it always has to be premised on the basic tenets of safety and liquidity. You're always trying to strike that right balance, and if you have to err on the side of caution, obviously you do so. More specific to today's current environment, obviously it's the rising rate environment. The Fed raised rates three times last year. Our expectation is clearly that they're on a similar path this year so we're managing against that backdrop.... What does that mean from a portfolio management or portfolio construction standpoint? You have to be very focused, very disciplined on how you build out your maturity ladder. You have to pay attention to final maturities of fixed rate paper and reset dates of floating rate notes.
MFI: What are you buying? Kolk: It's a very benign credit environment, but those are the times that you have to have a more heightened sense of awareness.... I think you always have to be very vigilant on the credit side, and that's something we spend a tremendous amount of time on. We're always focused not only on fundamental credit risk but clearly headline risk; we're not buying securities from areas of the world that we think might lead to an increased incidence of headline risk.... [Given the rate environment], we're fairly well overweight floaters at this point, predominantly Libor based. Libor is a really cheap index right now.... I think in the rates funds, T-bill floaters are interesting right now as the 3-month bill starts to price in a little bit of that Fed hike premium.
MFI: Can a Govt fund be too big? Kolk: Fortunately, the government, and Treasury funds for that matter, operate in a space that is the largest and most liquid in the world, so I think that the benefits of being large in that space far outweigh any potential or perceived scarcity of securities in the marketplace. I think it's a fairly easy space to get invested in, and I think scale is something that clearly is beneficial. As you're out in the marketplace marketing a fund, we have and we pay attention to how much of a fund any one client holds as a percentage of the fund, and clients do the same. [On the debt ceiling], fortunately, it's an exercise we've been through over the last handful of years. You clearly try to limit exposure to the perceived areas that could come under pressure.
MFI: What are customers saying? McMullen: They're certainly focused on, and have noticed, higher rates, and they're growing more sensitive to fund rates versus deposit rates.... I don't see a lot of client concern around the impact of rising rates from a risk standpoint, given the Fed's current approach of 25 [bps] at a time.... In general, we've seen less client focus and concern on the EU regulatory changes.... I think the general talking point across the industry is that this is not going to be a major event.... They are focused on their plans related to repatriation. We are already starting to see some [assets] moving around, being rehypothecated back to the U.S.
MFI: What about fees? Kolk: With most of the AUM now concentrated in [government] rates funds, it's become a more yield sensitive market. A lot of clients see very little differentiation between the major government fund providers outside of yield. So you can have a significant impact on AUM as a result fees. Potential fee compression is probably one of the most important issues facing the money market fund business.... I think the good news is we're not talking about yield floor waivers, they were the worst kind. Overall, the pressure [on fees] is not up, it's down.
MFI: Talk more about Ultra Short Income. Kolk: First of all, being a bond fund and not a money market fund ... it does not follow the money market fund rules, SEC Rule 2a-7. As a result, it has a different risk profile than money market funds. We're very clear with clients on that point.... The objectives are to maintain liquidity and preserve capital while generating income.... They are similar to prime funds in that ultrashort bond funds have floating NAVs, [but] no liquidity trigger-based gates and fees.
What's really important too is that ultrashort funds can vary meaningfully in terms of their portfolio strategy permissible investments, duration, etc. We constructed our fund to be on the very conservative side of the category. For example, it has a max WAM of 90 days and a max WAL of 180 days, which of course is different than money market funds. It's basically a fund that's comprised of plain vanilla money market securities.... You can add a little bit of incremental return but not significantly alter the risk profile.
MFI: Who invests in the ultrashort? McMullen: Size is an issue in terms of attracting institutional investors. We've seen a lot of interest, and we have a number of institutions that have come into the fund. So, it's a nice mix of institutional and high net worth clients.... It's definitely getting meaningful traction in the institutional space, and as it gets bigger we would expect that start to accelerate.
MFI: Any thoughts on H.R. 2319? McMullen: We don't have a public stance on that, but it's not something we focus on and it's not something we find clients talking about.... I think if clients supported that and were more interested in that, I think we'd have a deeper interest.
MFI: Is brokerage still a big investor? Kolk: It's an important part of the business. It doesn't represent anywhere near a majority of the assets -- the bulk of our book is the institutional client base. But there certainly is a need and demand on the brokerage side ... for money market funds, and we see that continuing.
MFI: What's your outlook for 2018 like? McMullen: I'm definitely optimistic, but it's a cautious optimism. Part of that is due to the good industry AUM growth we saw in the latter half of 2017. But there are a lot of crosswinds.... I think the Fed hikes should be additive [but] repatriation is probably a net detractor in the medium term. There's a lot of talk and we see a lot more deal flow and increased M&A, and that has certainly been positive for funds. I think risk off/risk and the EU regulatory changes are big question marks. In terms of prime funds, I think you're talking about a slow grind higher, and we expect to see steady growth in the ultrashort space.
The Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary late last week. It shows that total money fund assets fell $44.3 billion in January to $3.081 trillion, but Prime funds inched higher (after falling for the first time in 12 months last month). Prime MMF assets rose by $3.2 billion to $669.4 billion (after falling $13.6 billion in December, but gaining $14.3 billion in November, $1.0 billion in October, and $22.8 billion in September). Government money funds decreased by $54.7 billion, while Tax Exempt MMFs rose by $7.2 billion. Gross yields rose again for Prime and Government funds, but plunged for Tax Exempt MMFs. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. We review their latest numbers below.
Overall assets decreased by $44.3 billion in January, after increasing by $45.2 billion in December and $55.4 billion in November, but decreasing by $9.5 billion in October. Total MMFs increased by $46.2 billion in September, $71.2 billion in August, and $19.9 billion in July. Over the 12 months through 1/31/18, total MMF assets increased $164.1 billion, or 5.6%. (Note that the SEC's series includes a number of private and internal money funds not reported to ICI or others, which Crane Data also now tracks.)
Of the $3.081 trillion in assets, $669.4 billion was in Prime funds, which increased by $3.2 billion in January. Prime MMFs decreased by $13.6 billion in December, but increased by $14.3 billion in November, $1.0 billion in October, $22.8 billion in September, and $16.8 billion in August. Prime funds represented 21.7% of total assets at the end of January. They've increased by $107.3 billion, or 19.1%, over the past 12 months. But they've decreased by $896.1 billion over the past 2 years. (Over $1.1 trillion shifted from Prime to Government money market funds in the year leading up to October 2016's Money Fund Reforms.)
Government & Treasury funds totaled $2.270 billion, or 73.7% of assets,. They were down $54.7 billion in January, but up by $57.3 billion in December and $40.8 billion in November. Govt MMFs were down $11.2 billion in October, but they increased $24.5 billion in September, $56.8 billion in August and $8.0 billion in July. Govt & Treas MMFs are up $50.5 billion over 12 months (2.3%). Tax Exempt Funds increased $7.2B to $141.6 billion, or 4.3% of all assets. The number of money funds is 380, up one funds from last month but down 31 from 1/31/17.
Yields rose in January for Taxable MMFs after jumping in December (following the Fed move in Dec.). The Weighted Average Gross 7-Day Yield for Prime Funds on January 31 was 1.58%, up 6 basis points from the previous month and up 0.67% from January 2017. Gross yields increased to 1.38% for Government/Treasury funds, up 0.05% from the previous month, and up from 0.78% in January 2017. Tax Exempt Weighted Average Gross Yields plummeted 41 bps in January (after spiking in December) to 1.18%; they've increased by 46 bps since 1/31/17.
The Weighted Average Net Prime Yield was 1.38%, up 0.07% from the previous month and up 0.71% since 1/31/17. The Weighted Average Prime Expense Ratio was 0.20% in January (down one bps from the previous month). Prime expense ratios are down by four bps over the past year. (Note: These averages are asset-weighted.)
WALs were mixed but WAMs were lower across all categories in January. The average Weighted Average Life, or WAL, was 60.2 days (down 2.5 days from last month) for Prime funds, 90.6 days (up 1.9 days) for Government/Treasury funds, and 26.0 days (down 4.0 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 27.0 days (down 2.3 days from the previous month) for Prime funds, 31.1 days (down 1.6 days) for Govt/Treasury funds, and 24.0 days (down 3.9 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 27.7% in January (down 6.6% from previous month). Total Weekly Liquidity was 49.8% (down 0.6%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $88.7 billion, followed by the US with $72.4 billion, France with $62.1B, Japan ($50.2B), and Australia/New Zealand with $42.4B. Sweden ($39.1B), the Netherlands ($36.6B), the UK ($32.5B), Germany ($28.7B) and Switzerland ($20.9B) rounded out the top 10 countries.
The gainers among Prime MMF bank related securities for the month included: France (up $23.0B), the Netherlands (up $22.2B), Sweden (up $11.0B), the US (up $4.9B), Switzerland (up $4.5B), Germany (up $4.2B), Belgium (up $4.0B), the UK (up $2.0B), and Norway (up $1.1B). The biggest drops came from Canada (down $13.2B), Australia/NZ (down $4.7B), Singapore (down $2.8B), Japan (down $1.7B), China (down $578M), and Spain (down $133M). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $244.8B (up $72.7B from last month), while the Eurozone subset had $140.6B billion (up $53.8B). The Americas had $161.7 billion (down $8.4B), while Asian and Pacific had $104.4 billion (down $9.8B).
Of the $667.9 billion in Prime MMF Portfolios as of Jan. 31, $265.8B (39.7%) was in CDs (up from $229.6B), $120.8B (18.1%) was in Government securities (including direct and repo), down from $162.5B, $97.7B (14.6%) was held in Non-Financial CP and Other Short Term Securities (down from $98.8B), $141.6B (21.2%) was in Financial Company CP (up from $125.7B), and $42.0B (6.3%) was in ABCP (up from $41.4B). The Proportion of Non-Government Securities in All Taxable Funds was 18.7% at month-end, up from 16.9% the previous month. All MMF Repo with Federal Reserve plunged after quarter-end to $55.1B in January (the lowest level in over 2 years) from $288.1B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 35.1% were in maturities of 60 days and over (down from 37.4%), while 8.6% were in maturities of 180 days and over (the same percentage as last month).
Charles Schwab is making a number of changes to its brokerage cash "sweep" program, including expanding the amount of FDIC insurance and reducing the role of money market funds. In a revised "Cash Features Disclosure Statement," Schwab gives a "Summary of Changes to Schwab's Cash Features Program." They state, "Effective February 16, 2018, Schwab will begin introducing certain changes to its Bank Sweep and Schwab One Interest cash features. These changes include: Transitioning to an increase in the number of depository institutions participating in the Bank Sweep feature from one bank to two banks, both of which are affiliated with Schwab -- Charles Schwab Bank and Charles Schwab Signature Bank." (See also our Jan. 4 News, "Schwab Liquidating MMF, Shifting to FDIC; Brokerage Sweep Rates Jump," and our Oct. 23, 2017 "Link of the Day," "Schwab Earnings Talk MMFs.")
Schwab explains, "For the Bank Sweep feature, adding an additional interest rate tier and having the interest rate tiers based upon deposit balances held through a single Schwab brokerage account ... rather than the value of assets in your household, referred to as a Household Balance.... For the `Schwab One Interest feature, adding an additional interest rate tier and having the interest rate tiers based on the free credit balance in a single Account rather than your Household Balance."
They tell us, "If Bank Sweep is the cash feature for your Account: On February 16, 2018, we will begin converting your feature to the multiple-bank version of the Bank Sweep feature. Schwab will provide you with at least 30 days' notice.... Until your feature is converted, you will continue to have the single-bank version of the Bank Sweep feature and your free credit balance will continue to be deposited into deposit accounts at Charles Schwab Bank without limit."
Schwab's update says, "Once your feature is converted to the multiple-bank version of the Bank Sweep feature, your free credit balance will be deposited in deposit accounts at our Affiliated Banks in the order indicated on the Affiliate Bank list included at the end of this Cash Features Disclosure Statement or pursuant to any subsequent notice you may receive. As a result, you will be eligible for an additional $250,000 per depositor of FDIC deposit insurance."
It continues, "If Bank Sweep is the cash feature for your Account: The amount of deposit account balances in the Affiliated Banks in one Account could be less than the value of the assets in your Household Balance, which generally would result in the interest rate being determined by a lower tier. As of February 16, 2018, the interest rate on all tiers is the same, and therefore the change in the manner in which your tier is determined will not impact the interest rate you receive on your deposits."
The disclosure explains, "For the Bank Sweep feature: You will need to maintain deposit balances at Charles Schwab Bank substantially in excess of the Federal Deposit Insurance Corporation's $250,000 insurance limit ($500,000 for joint Accounts) in order to qualify for the highest interest rate tiers.... After your feature is converted to the multiple-bank version, deposit account balances held by joint Accounts could be substantially or fully insured and qualify for the highest tiers."
It adds, "If Schwab One Interest is the cash feature for your Account: The amount of your free credit balance could be less than the value of assets in your Household Balance, which generally would result in the interest rate being determined by a lower tier. As of February 16, 2018, the interest rate on all tiers is the same, and therefore the change in the manner in which your tier is determined will not impact the interest rate you receive on your free credit balance."
Schwab tells investors, "For the Schwab One Interest feature, you will need to maintain a free credit balance that is substantially in excess of the Securities Investor Protection Corporation's ("SIPC") $250,000 coverage limit for cash in order to qualify for the highest interest rate tiers, but your free credit balance may be eligible for protection in excess of SIPC coverage through Schwab's excess SIPC coverage policy with a private insurer."
They explain, "Schwab intends to eliminate the Money Fund Sweep feature as a cash feature over a period of years. Clients who become ineligible for the Money Fund Sweep feature will receive prior notification of such change in eligibility.... Generally, new accounts opened by new and existing clients may not select the Money Fund Sweep feature as their cash feature. These Accounts may select either the Bank Sweep, Bank Sweep for Benefit Plans, or Schwab One Interest feature, subject to the eligibility rules set forth herein."
Finally, Schwab writes, "Generally, existing accounts may not change their cash feature from the Bank Sweep, Bank Sweep for Benefit Plans, or Schwab One Interest feature to the Money Fund Sweep feature. Certain accounts will continue to be eligible for the Money Fund Sweep feature, including Managed Accounts, International Accounts, and some Retirement Plan Accounts. Accounts at Schwab's international affiliates will have different available cash features."
For more news on brokerage sweeps, see our Oct. 12, 2017 News, "Wells Bumps Up Brokerage Sweep Rates, Raises FDIC Insurance Coverage," our May 9, 2017 News, "Signs of Life in FDIC Brokerage Sweeps; StoneCastle on Sweep Platforms," our Aug. 15, 2016 News, "Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes," and our June 29, 2016 News, "UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund." (Ask us too if you'd like to see our most recent Brokerage Sweep Intelligence for the latest rates.)
Crane Data's MFI International shows assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), jumping in January but falling in the latest week. Last year, assets of all 3 currencies combined increased by $100 billion, or 13.7%, to $831 billion. Year-to-date in 2018 (through 2/13/18), MFII assets are up another $37 billion to $868 billion, which many believe is a result of pending "repatriation" of US dollar assets held in Europe. U.S. Dollar (USD) funds (158) account for over half ($457 billion, or 52.6%) of the total, while Euro (EUR) money funds (98) total E91 billion and Pound Sterling (GBP) funds (110) total L211 billion. USD funds are up $32 billion, YTD, and were up $27B in 2017. (They fell by $10 billion over the past week though.)
Euro funds are down E7 billion YTD but were up E3B in 2017, while GBP funds are down L8B YTD after rising L29B in 2017. USD MMFs yield 1.29% (7-Day) on average (as of 2/13/18), up from 1.19% at the end of 2017 and 0.56% at the end of 2016. EUR MMFs yield -0.49% on average, up from -0.55% on 12/29/17 and -0.49% on 12/30/16, while GBP MMFs yield 0.30%, up from 0.24% at the end of 2017 and 0.19% at the end of 2016. We review our latest MFI International Portfolio Holdings statistics, and also review ICI's latest MMF Holdings report, below.
Crane's latest MFI International Money Fund Portfolio Holdings, with data (as of 1/31/18), shows that European-domiciled US Dollar MMFs, on average, consist of 16% in Treasury securities, 26% in Commercial Paper (CP), 21% in Certificates of Deposit (CDs), 18% in Other securities (primarily Time Deposits), 16% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 32.0% of their portfolios maturing Overnight, 13.3% maturing in 2-7 Days, 21.3% maturing in 8-30 Days, 12.2% maturing in 31-60 Days, 10.6% maturing in 61-90 Days, 6.9% maturing in 91-180 Days, and 3.7% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (26.3%), France (15.8%), Japan (10.1%), Canada (9.4%), Sweden (5.5%), United Kingdom (5.5%), The Netherlands (5.4%), Germany (5.3%), Australia (5.1%), Singapore (2.3%), China (2.0%) and Switzerland (1.1%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $78.0 billion (15.7% of total assets), BNP Paribas with $23.7B (4.8%), Credit Agricole with $18.2B (3.7%), Societe Generale with $14.0B (2.8%), Mitsubishi UFJ Financial Group Inc with $13.4B (2.7%), Wells Fargo with $13.0B (2.6%), Barclays PLC with $12.4B (2.5%), Toronto-Dominion Bank with $12.0B (2.4%),`RBC <b:>`_ with $11.6B (2.3%), and ING Bank with $8.8B (1.8%).
Euro MMFs tracked by Crane Data contain, on average 48% in CP, 23% in CDs, 22% in Other (primarily Time Deposits), 6% in Repo, 0% in Treasuries and 1% in Agency securities. EUR funds have on average 20.9% of their portfolios maturing Overnight, 9.7% maturing in 2-7 Days, 19.5% maturing in 8-30 Days, 16.8% maturing in 31-60 Days, 11.7% maturing in 61-90 Days, 17.0% maturing in 91-180 Days and 4.4% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (29.0%), Japan (12.3%), US (8.7%), The Netherlands (8.3%), Sweden (7.8%), Belgium (6.3%), Switzerland (6.1%), Germany (6.0%), China (4.0%), and the United Kingdom (2.7%).
The 10 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E5.1B (5.7%), Svenska Handelsbanken with E3.6B (4.0%), Mizuho Corporate Bank Ltd with E3.4B (3.9%), ING Bank with E3.4B (3.8%), Credit Agricole with E3.2B (3.6%), Rabobank with E3.1B (3.5%), Credit Mutuel with E3.1B (3.4%), Nordea Bank with E3.0B (3.4%), Dexia Group with E2.9B (3.2%), and KBC Group NV with E2.7B (3.0%).
The GBP funds tracked by MFI International contain, on average (as of 1/31/18): 40% in CDs, 24% in Other (Time Deposits), 24% in CP, 9% in Repo, 2% in Treasury, and 1% in Agency. Sterling funds have on average 22.3% of their portfolios maturing Overnight, 11.7% maturing in 2-7 Days, 17.5% maturing in 8-30 Days, 14.2% maturing in 31-60 Days, 14.4% maturing in 61-90 Days, 15.7% maturing in 91-180 Days, and 4.2% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (20.5%), Japan (15.6%), United Kingdom (13.2%), The Netherlands (9.2%), Canada (6.4%), Germany (5.8%), Sweden (4.6%), the US (4.5%), Australia (3.5%), and Singapore (3.4%).
The 10 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L8.5B (5.5%), BPCE SA with L7.2B (4.6%), Credit Agricole with L6.3B (4.0%), Sumitomo Mitsui Banking Co. with L5.8B (3.7%), Mitsubishi UFJ Financial Group Inc. with L5.6B (3.6%), Toronto Dominion Bank with L5.5B (3.5%), Rabobank with L5.3B (3.4%), BNP Paribas with L5.0B (3.2%), ING Bank with L5.0B (3.2%), and Sumitomo Mitsui Trust Bank with L4.7B (3.0%).
In other news, the Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (with data as of Jan. 26, 2017) yesterday. This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See also Crane Data's Feb. 12 News, "Feb. Money Fund Portfolio Holdings: TD, CP, CDs Jump; Repo Plummets.")
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in January, prime money market funds held 23.1 percent of their portfolios in daily liquid assets and 44.8 percent in weekly liquid assets, while government money market funds held 57.2 percent of their portfolios in daily liquid assets and 77.5 percent in weekly liquid assets." Prime DLA decreased from 30.1% last month and Prime WLA increased from 44.6% last month. Govt MMFs' DLA decreased from 60.5% last month and Govt WLA increased from 75.0% last month.
ICI explains, "At the end of January, prime funds had a weighted average maturity (WAM) of 27 days and a weighted average life (WAL) of 66 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 31 days and a WAL of 91 days." Prime WAMs were down 3 days from last month, and WALs were up 2 days. Govt WAMs were down 2 days from December and Govt WALs increased by 2 days from last month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas declined from $212.41 billion in December to $181.00 billion in January. Government money market funds' holdings attributable to the Americas declined from $1,899.22 billion in December to $1,716.82 billion in January."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $181.0 billion, or 39.5%; Asia and Pacific at $87.5 billion, or 19.1%; Europe at $186.1 billion, or 40.6%; and, Other (including Supranational) at $3.6 billion, or 0.9%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.717 trillion, or 77.2%; Asia and Pacific at $108.7 billion, or 4.9%; and Europe at $390.0 billion, or 17.5%.
The February issue of Crane Data's Bond Fund Intelligence, which will be sent out to subscribers Wednesday, features the lead story, "ICI Says Bond Fund Flows Remain Strong, Despite Rates," which reviews recent comments from ICI's new Chief Economist Sean Collins, and the profile, "JPMAM's McNerny, Crane Discuss Ultra-Shorts at MFU," which excepts highlights from the segment on Bond Funds at our recent Money Fund University. Also, we recap the latest Bond Fund News, including losses in January for most funds and the latest on the jump in rates. BFI also includes our Crane BFI Indexes, which showed decreases in January in most sectors except ultra-short, global and high yield. We excerpt from the latest BFI below. (Watch for more excerpts from our MFU profile later this month on www.cranedata.com, and contact us if you'd like to see a copy of our latest Bond Fund Intelligence and BFI XLS.)
Our lead Bond Fund Intelligence story says, "The Investment Company Institute published a video with Chief Economist Sean Collins late last week entitled, "Bond Fund Flows Remain Strong Despite Rising Interest Rates." When asked about the rising rate environment, Collins comments, "It looks like this time, it's for real. The Fed has raised short-term interest rates 1.5% since September of 2016 and, judging from Fed fund's future markets, it looks like they'll probably go about another 1.5% in the rest of 2018. That's likely to put upward pressure on longer-term interest rates, and downward pressure on bond prices -- and, in return, downward pressure on bond fund returns."
He explains, "Historically, what we've seen as interest rates rise, investors in bond funds tend to respond very modestly, pulling some money out -- but it's very modest. What we saw in 2017 was a little bit of a disconnect. We saw a very sharp rise in the stock market -- about 20%. Bond returns were about flat. And you would think that, in that environment, people wouldn't be putting money into the bond funds -- but just the reverse happened. We saw very strong inflows into bond funds, and that pretty much continued throughout the year."
BFI's McNerny and Crane Profile says, "Last month, Crane Data's Money Fund University conference included a segment entitled, "Ultra-Short Bond Funds & SMAs," which featured James McNerny, MD & Portfolio Manager at J.P. Morgan Asset Management, as well as Crane Data's Peter Crane. The two discussed the basics of the bond fund marketplace, recent trends in the conservative ultra-short bond fund space, and the status of the short-term separately managed account market. We excerpt some of their comments below."
JP Morgan's McNerny, who helps run almost $60 billion in "Managed Reserves" assets, tells us, "I've been in the industry now for 17 years.... [After the crisis, Managed Reserves] was a fledgling business. We one portfolio manager at the time, David Martucci, and we had few billion in assets. In the last seven years, we've grown the product to over 120 SMA accounts, two mutual funds, we just launched an ETF, and our total assets are just shy of $70 billion."
When asked how he learned the business, McNerny answered, "There's no better way to learn [than from working for experts].... Nobody really teaches ... about fixed income. It [takes] three to five years for you to completely wrap your head around everything you need to know about this job.... So I would just encourage anyone who is new and starting out to really push through and don't get frustrated. There are tons of acronyms and different ways to explain the same thing." He mentions "Bloomberg, The Wall Street Journal, The Financial Times, and economists" as information sources.
A Bond Fund News brief entitled, "Returns Down For Most in January," explains, "Most bond fund categories showed losses except Ultra-Short, Global and High Yield. Yields rose for all but High Yield funds last month. The BFI Total Index averaged a 1-month return of -0.35% and the 12-month gain fell to 3.15%. The BFI 100 returned -0.44% in Jan. and 3.12% over 1 year. The BFI Conservative Ultra-Short Index returned 0.11% over 1 month and 1.31% over 1-year; the BFI Ultra-Short Index averaged 0.06% in Jan. and 1.24% over 12 mos. Our BFI Short-Term Index returned -0.15% and 1.36%, and our BFI Intm-Term Index returned -0.85% and 2.42% for the month and year. The BFI High Yield Index rose 0.60% in Jan. and 5.70% for 1 year."
Another brief, entitled, "Barron's Comments, 'As Rates Jolt Market, Bond Strategy Finally Shines,' says, "Go-anywhere bond funds didn't go anywhere for several years. But with interest-rate fears roiling the markets, they've starting to look a lot better. As of Thursday, prominent unconstrained funds were beating the Bloomberg Barclay's Aggregate Bond handily. While the index was down 1.15% for the year, BlackRock's $32.8-billion Strategic Income Opportunities Portfolio (BASIX) was up a whopping 1.35%. The $3.4 billion Pimco Unconstrained Bond Fund (PUBAX) was up .36% year to date. And former Pimco bond guru Bill Gross, now at Janus Henderson, has steered his $2.2 Global Unconstrained Bond Fund (JUCAX) to a .56% gain for the year."
Yet another brief comments, "BlackRock's Jeff Rosenberg Blogs '4 themes key for fixed income investing in 2018'" He writes, "We see four key themes likely to shape fixed income investing in 2018, as I write in my new Fixed income strategy Fuel for (over)heating and more of my favorite themes.... Fiscal stimulus from tax cuts and spending plans -- on top of a U.S. economy operating at full employment and both the U.S. and a handful of other developed economies operating above capacity -- may provide fuel for an overheating debate in 2018."
A sidebar entitled, "Best Days Behind Us Says Columbia in 2018 Playbook," tells us, "Columbia Threadneedle writes in "The 2018 fixed-income playbook: less risk, more diversification," "On the heels of two good years in the bond market, the best days for fixed income are likely behind us. In 2016, there were strong returns in most sectors -- especially high-yield corporate bonds, which generated double digit gains. It was more of the same in 2017: The year was driven by strong global demand and scarce inflation. Returns will likely struggle to match a similar pace in 2018 based on a lower starting point for yields and expectations for low inflation and rising interest rates."
Global Head of Fixed Income Colin Lundgren explains, "And there's no extra risk premium to compensate investors for any negative surprises. The temptation is to extrapolate recent returns and suggest another good year for bonds, but our analysis suggests something less. A lower starting point in bond yields reduces the total return opportunity in fixed income.... To put it simply: Low starting yields mean less cushion for being wrong and less upside for being right."
Finally, we'd like to remind you about our second annual Bond Fund Symposium conference, which will be held March 22-23, 2018 at the InterContinental Los Angeles Downtown. Our first bond fund event last year in Boston attracted 150 bond fund managers, marketers, fixed-income issuers, investors and service providers, and we expect our LA show to be even bigger. For those planning on attending, please register and make hotel reservations soon, and we hope to see you in LA next month!
Mutual fund news website ignites.com wrote yesterday, "Ultra-Shorts Attract Assets, SEC Scrutiny Post–Money Fund Reform." The article says, "Ultra-short bond funds have become a prime beneficiary of the SEC's money market fund reforms, reporting substantial growth in assets during 2017 — the first full year the rules were in effect. But as the number of products and their assets under management have swelled, the SEC has been looking more closely at new product registrations. The agency wants to ensure that the funds are sufficiently liquid. How shops disclose strategy and risk is another major staff concern, says one '40 Act lawyer." We review the ignites piece below, and we take another look back at the Subprime Liquidity Crisis 10 years ago.
The ignites piece quotes Stephen Cohen, partner at Dechert, "There's always this fine line of how you market these funds. If you market them as a cash alternative, it has to be very clear that the fund can lose money." They tell us, "The SEC wants to make sure that shops aren't billing short-term bond funds as akin to money market funds when they are not, because money funds must operate under the constraints of the new regulations, Cohen adds." (See also Crane Data's Jan. 23 News, "Jan. BFI Profiles Dechert's Cohen on Regulations Impacting Bond Funds.")
The article explains, "Investors poured about $40 billion into ultra-short bond funds last year, pushing assets in the category up by 37%, from $111 billion at the end of 2016 to $152.7 billion as of Dec. 31, according to data from Morningstar Direct. This surge in assets made ultra-short bond funds the third-fastest-growing category among taxable bond products last year, according to Morningstar.... Last year's growth helped ultra-shorts hopscotch past bank loan funds and inflation-protected bond funds in total assets."
It tells us, "The number of ultra-short funds on the market has climbed from 53 as of the end of 2014 to 83 as of Dec. 31, according to Crane Data, which began tracking the funds three years ago. A dozen ultra-short funds launched in 2017. In part, ultra-short funds have the SEC to thank for their growth."
They quote our Peter Crane, "It's a combination of the money fund reforms and the ultra-low yields.... It's tough to separate the two.... Ultra-shorts have attracted investors who want higher yields than those of money funds.... Investors are still yield-starved.... The Federal Reserve's string of interest rate increases has pushed net yields on numerous money funds above 1%, but net yields on ultra-shorts are nearing 2%, he adds."
Ignites comments, "Crane Data tracks a subset of ultra-short bond funds that it deems to be more conservative than others in the category. The funds' holdings have durations of less than six months and maturities of less than a year. They do not invest in junk bonds. The assets of this subset have grown even more quickly than the broader category, rising by 41% from $34.2 billion at the end of 2016 to $48.5 billion as of Dec. 31, according to the money fund and bond fund tracker."
They add, "The fastest-growing conservative ultra-short fund in the past year was Morgan Stanley's Ultra Short Income fund, which launched in April 2016. That fund more than quadrupled its assets during the year ended Dec. 31, 2017, growing from $1.3 billion to $6.4 billion, according to Crane Data. Sales into the ultra-short category have come mostly via financial advisors and high-net-worth individuals, even though firms have been heavily courting institutional and corporate clients, says Crane."
Finally, the piece says, "In line with the SEC's additional scrutiny, Crane warns that ultra-short bond funds don't have the homogeneity of money funds, and that investors should carefully review each fund's holdings.... [T]his space has gotten the crap kicked out of it more times than you can count,' Crane says."
In other news, we continue looking back at the 10-year anniversary of the seeds of the "Great Recession," or as we refer to it, the Subprime Liquidity Crisis. It began in August 2007, but February 2008 was one of the roughest months for money markets. (See our February 2008 News Archives.) Ten years ago today (2/13/08), Crane Data wrote the brief, "`"Break The Buck" Rumors False, No Money Mkt Funds Trading Below $1 <i:https://cranedata.com/archives/all-articles/1384/>`_." We explained, "Rumors circulated this morning that a money market mutual fund had broken the buck, or dropped below its $1.00 share price. These rumors are false. No money fund has declined in value, to our knowledge, and none are expected to. The dangers from SIV-related debt have been diluted by time and asset inflows, and the handful of defaults and downgrades have been met by bailouts or cash infusions by investment managers."
Our piece continued, "This time rumors, allegedly based on comments by Miller Tabak and spread by HSBC Securities, among others, had centered around Citi, failed auctions and SIV support actions.... Again, rumors of a money fund breaking the buck are incorrect and were based on false information, likely circulated with malicious intent. Money funds experienced a number of similar false rumors during the ABCP Crisis of 2007. At least six separate incidents of losses or redemption freezes at enhanced cash private placement "3c-7" funds, boutique investment advisors, and local government pools all were erroneously called money market or cash funds over the past six months by reporters and market participants."
Our Feb. 14, 2008, article, "`SEC Chairman Cox Says Money Market Funds $1 NAV Not Threatened," discusses the same topic. It said, "Securities & Exchange Commission Chairman Christopher Cox, in testimony before today's Senate Banking Committee hearing hearing, said, "[T]he Commission staff has been active in working with the managers of money market funds as they cope with the downgrading of ratings and the declines in value of securities in which their funds have invested. Commission rules limit money market funds to investing in high-quality, short-term investments in an effort to ensure that these bedrocks of the financial system are reliable in all market conditions. Losses by a money market fund would be reflected by the fund re-pricing its securities below $1.00 (known as "breaking the buck"). Only one fund, and that of very modest size, has ever broken the buck [Community Bankers U.S. Govt MMF] since the development of money market funds in the 1970s. The Commission is closely monitoring the fund industry and while we have seen some instances of funds requiring infusions of capital from the corporate parents of fund advisers, we are not aware of any money market fund that is threatened with having to reprice below $1.00."
See also our Feb. 12, 2008 News, "Credit Suisse Takes $702 Million 4th Qtr Charge for Money Fund Damage." It explains, "In what is by far the worst damage to a money market fund advisor from the liquidity crisis of 2007, Credit Suisse took a $702 million charge in its latest quarter over valuation losses in its "money market fund repositioning".... Credit Suisse purchased $8.43 billion of SIVs and ABS from its Credit Suisse Prime Inst MMF and "offshore" money funds and took paper losses of $835 million in total in 2007."
Finally, see our Feb. 21, 2008 News, "Whistlejacket Could Add to Fund Advisor Support Tab; Dresdner Backs K2," discusses another major event in February 2008. We wrote then, "First the bad news. Yesterday, reports hit that the $7 billion Whistlejacket SIV had been forced into receivership and possibly default. This raises the possibility that more advisors could be forced to purchase or protect the SIVs troubled securities from any money funds still holding this debt. Crane Data counts at least six advisors that hold this name in their most recent filings, but only one shows a maturity date lasting into 2008. Standard & Poor's listed Whistlejacket as the 7th largest SIV held by rated money market funds with $1.95 billion in exposure in a November 2007 research piece (the number almost certainly has declined since). (See also Treasury Strategies' recent postings on LinkedIn on the crisis.)
Crane Data released its February Money Fund Portfolio Holdings Friday, and our most recent collection of taxable money market securities, with data as of Jan. 31, 2018, shows a huge drop in Repo, and a jump in Time Deposits (Other), CP and CDs. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $3.2 billion to $2.896 trillion last month, after increasing $37.2 billion in December, $18.4 billion in November, and $77.7 billion in October. Repo remained the largest portfolio segment, though it plummeted following its quarter-end spike to over $1.0 trillion. It was followed by Treasuries and Agencies. CP remained a distant fourth ahead of CDs, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Visit our Content center to download the latest files, or contact us to see our latest Money Fund Portfolio Holdings reports.)
Among all taxable money funds, Repurchase Agreements (repo) plunged $80.9 billion (-8.0%) to $928.8 billion, or 32.1% of holdings, after jumping $70.5 billion in December, but decreasing $16.4 billion in November and $3.9 billion in October. Treasury securities fell $1.5 billion (-0.2%) to $738.6 billion, or 25.5% of holdings, after rising $3.8 billion in December, falling $3.0 billion in November, and rising $66.0 billion in October. Government Agency Debt jumped $25.3 billion (3.6%) to $722.1 billion, or 24.9% of all holdings, after rising $21.5 billion in December and $10.5 billion in November, but falling $2.2 billion in October. Repo, Treasuries and Agencies total $2.390 trillion, representing a massive 82.5% of all taxable holdings.
CP, CDs and Other (mainly Time Deposits) securities all jumped in the first month of the year. Commercial Paper (CP) was up $23.1 billion (12.3%) to $211.7 billion, or 7.3% of holdings (after decreasing $8.1 billion in December, and increasing $14.9 billion in November and $3.3 billion in October). Certificates of Deposits (CDs) rose by $13.3 billion (7.8%) to $183.5 billion, or 6.3% of taxable assets (after decreasing $23.4 billion in December, and increasing $8.9 billion in November and $14.1 billion in October). Other holdings, primarily Time Deposits, jumped $27.6 billion (36.7%) to $102.8 billion, or 3.6% of holdings. VRDNs held by taxable funds decreased by $3.8 billion (-30.6%) to $8.5 billion (0.3% of assets).
Prime money fund assets tracked by Crane Data rose to $650 billion (up from $637 billion last month), or 22.4% (up from 22.0%) of taxable money fund holdings' total of $2.896 trillion. Among Prime money funds, CDs represent under a third of holdings at 28.2% (up from 26.7% a month ago), followed by Commercial Paper at 32.5% (up from 29.6%). The CP totals are comprised of: Financial Company CP, which makes up 21.2% of total holdings, Asset-Backed CP, which accounts for 6.3%, and Non-Financial Company CP, which makes up 5.0%. Prime funds also hold 6.3% in US Govt Agency Debt, 5.7% in US Treasury Debt, 3.2% in US Treasury Repo, 2.0% in Other Instruments, 12.2% in Non-Negotiable Time Deposits, 5.2% in Other Repo, 2.4% in US Government Agency Repo, and 1.1% in VRDNs.
Government money fund portfolios totaled $1.546 trillion (53.7% of all MMF assets), down from $1.583 trillion in December, while Treasury money fund assets totaled another $700 billion (24.2%), up from $673 billion the prior month. Government money fund portfolios were made up of 44.1% US Govt Agency Debt, 20.0% US Government Agency Repo, 15.3% US Treasury debt, and 20.3% in US Treasury Repo. Treasury money funds were comprised of 66.4% US Treasury debt, 33.5% in US Treasury Repo, and 0.0% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.246 trillion, or 77.6% of all taxable money fund assets, down from 78.0% last month.
European-affiliated holdings jumped $238.2 billion in January to $654.0 billion among all taxable funds (and including repos); their share of holdings soared to 22.6% from 14.4% the previous month. Eurozone-affiliated holdings jumped $180.0 billion to $428.4 billion in January; they account for 14.8% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $10.1 billion to $227.6 billion (7.9% of the total). Americas related holdings fell $224.8 billion to $2.013 trillion and now represent 69.5% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $104.2 billion, or -15.5%, to $569.6 billion, or 19.7% of assets; US Government Agency Repurchase Agreements (up $28.6 billion to $325.2 billion, or 11.2% of total holdings), and Other Repurchase Agreements ($33.9 billion, or 1.2% of holdings, down $5.3 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $16.2 billion to $137.8 billion, or 4.8% of assets), Asset Backed Commercial Paper (down $0.4 billion to $41.0 billion, or 1.4%), and Non-Financial Company Commercial Paper (up $7.3 billion to $32.8 billion, or 1.1%).
The 20 largest Issuers to taxable money market funds as of Jan. 31, 2018, include: the US Treasury ($738.6 billion, or 25.5%), Federal Home Loan Bank ($579.5B, 20.0%), BNP Paribas ($122.8B, 4.2%), RBC ($85.6B, 3.0%), Federal Farm Credit Bank ($74.2B, 2.6%), Credit Agricole ($62.4B, 2.2%), Wells Fargo ($61.8B, 2.1%), Barclays PLC ($55.8B, 1.9%), Federal Reserve Bank of New York ($55.0B, 1.9%), Societe Generale ($47.9B, 1.7%), HSBC ($45.0B, 1.6%), Nomura ($44.3B, 1.5%), Federal Home Loan Mortgage Co ($42.6B, 1.5%), JP Morgan ($40.3B, 1.4%), Natixis ($39.2B, 1.4%), Mitsubishi UFJ Financial Group Inc ($36.7B, 1.3%), Deutsche Bank AG ( $34.2B, 1.2%), Bank of Nova Scotia ($34.1B, 1.2%), Bank of America ($33.9B, 1.2%), and Citi ($33.4B, 1.2%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($286.0B, 28.3%), RBC ($74.8B, 7.4%), BNP Paribas ($62.9B, 6.2%), Wells Fargo ($49.4B, 4.9%), Nomura ($45.0B, 4.5%), Barclays PLC ($34.6B, 3.4%), Fixed Income Clearing Co ($33.9B, 3.4%), Bank of America ($29.8B, 2.9%), HSBC ($28.2B, 2.8%), and Deutsche Bank AG ($27.5B, 2.7%).
The 10 largest Fed Repo positions among MMFs on 1/31/18 include: Northern Trust Trs MMkt ($5.0B), Fidelity Cash Central Fund ($4.9B), ` Franklin IFT US Govt MM <b:>`_ ($4.8B), JP Morgan US Govt ($4.8B in Fed Repo), Goldman Sachs FS Treas Sol ($4.7B), BlackRock Lq T-Fund ($4.6B), Morgan Stanley Inst Liq Govt Sec ($4.0B), UBS Select Treas ($3.2B), Fidelity Sec Lending Cash Central ($3.1B), and Northern Inst Govt Select ($3.1B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($20.4B, 4.7%), Toronto-Dominion Bank ($16.7B, 3.9%), Credit Agricole ($15.6, 3.6%), Wells Fargo ($14.7B, 3.4%), BNP Paribas ($14.7B, 3.4%), Mitsubishi UFJ Financial Group Inc. ($14.3B, 3.3%), Australia & New Zealand Banking Group Ltd ($13.7, 3.2%), Bank of Nova Scotia ($13.7B, 3.2%), Canadian Imperial Bank of Commerce ($12.8B, 3.0%), and Swedbank AB ($12.7B, 3.0%).
The 10 largest CD issuers include: Wells Fargo ($14.6B, 4.0%), RBC ($12.2, 6.7%), Bank of Montreal ($12.1B, 6.7%), Sumitomo Mitsui Banking Co ($9.5B, 5.2%), Mitsubishi UFJ Financial Group Inc ($8.3B, 4.6%), Mizuho Corporate Bank Ltd ($7.8B, 4.3%), Toronto-Dominion Bank ($7.4B, 4.1%), Sumitomo Mitsui Trust Bank ($7.2B, 4.0%), Svenska Handelsbanken ($6.9B, 3.8%), and KBC Group NV ($6.7B, 3.7%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Toronto-Dominion Bank ($8.6B, 4.7%), Commonwealth Bank of Australia ($8.5B, 4.7%), Bank of Nova Scotia ($7.8B, 4.3%), Westpac Banking Co ($7.7B, 4.2%), Bank Nederlandse Gemeenten ($7.6B, 4.2%), BNP Paribas ($7.5B, 4.2%), JP Morgan ($7.3B, 4.0%), Credit Agricole ($6.2B, 3.4%), UBS AG ($6.0B, 3.3%), RBC ($5.6B, 3.1%).
The largest increases among Issuers include: BNP Paribas (up $52.0B to $122.8B, Credit Agricole (up $38.4B to $62.4B), Federal Home Loan Bank (up $38.1B to $579.5B), Credit Suisse (up $21.1B to $31.7B), Natixis (up $19.3B to $39.2B), Societe Generale (up $16.3B to $47.9B), ING Bank (up $14.4B to $33.0B), Barclays PLC (up $12.0B to $55.8B), JP Morgan (up $11.5B to $40.3B), and HSBC (up $10.8B to $45.0B).
The largest decreases among Issuers of money market securities (including Repo) in January were shown by: Federal Reserve Bank of New York (down $231.0B to $55.0B), Fixed Income Clearing Co (down $12.5B to $21.4B), RBC (down $12.2B to $85.6B), Federal Home Loan Mortgage Co (down $9.8B to $42.6B), Toronto-Dominion Bank (down $7.2B to 30.7B), Canadian Imperial Bank of Commerce (down $6.6B to $28.4B), Bank of Nova Scotia (down $5.1B to $34.1B), Federal National Mortgage Association (down $3.8B to $19.5B), Mitsubishi UFJ Financial Group Inc (down $2.2B to $36.7B), and Australia & New Zealand Banking Group Ltd (down $1.9B to $13.7B).
The United States remained the largest segment of country-affiliations; it represents 62.0% of holdings, or $1.795 trillion. France (9.9%, $285.7B) moved into the No. 2 spot and Canada (7.5%, $218.0B) dropped down to No. 3. Japan (5.9%, $171.0B) dropped down to fourth place, while the United Kingdom (4.4%, $127.2B) remained in fifth place. Germany (2.3%, $66.6B) remained in sixth place, and The Netherlands (2.2%, $63.6B) moved ahead of Australia (1.6%, $45.5B) to take seventh place. Switzerland (1.4%, $39.0B) moved up to No. 9 ahead of Sweden (1.4%, $39.0B) in tenth place. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of Jan. 31, 2017, Taxable money funds held 32.1% (down from 36.1%) of their assets in securities maturing Overnight, and another 15.1% maturing in 2-7 days (up from 12.1%). Thus, 47.2% in total matures in 1-7 days. Another 25.2% matures in 8-30 days, while 11.3% matures in 31-60 days. Note that over three-quarters, or 83.7% of securities, mature in 60 days or less (up slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 6.2% of taxable securities, while 7.9% matures in 91-180 days, and just 2.2% matures beyond 181 days.
After a sharp drop last week, money fund assets jumped in the latest week, according to the Investment Company Institute's latest "Money Market Fund Assets" report. Total MMF assets retook the $2.8 trillion level and Retail MMFs broke back above $1.0 trillion. After rising by $113 billion, or 4.1%, in 2017, money fund assets have declined by $16 billion, or -0.5%, year-to-date in 2018 (through 2/7). Money funds fell by $43.2 billion in January -- they normally see outflows in the first month of the year -- but the gains, including a large retail jump, this week indicate funds are likely seeing some assets seeking shelter from market turmoil. (Note that money funds aren't used in brokerage "sweep" accounts like they once were; much of the sweep business has shifted to banks over the past decade.) We review ICI's latest asset totals below, and we also excerpt from the "Money Fund University Highlights" article in our February MFI.
ICI writes, "Total money market fund assets increased by $27.64 billion to $2.83 trillion for the week ended Wednesday, February 7, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $24.45 billion and prime funds increased by $2.67 billion. Tax-exempt money market funds increased by $520 million." Total Government MMF assets, which include Treasury funds too, stand at $2.228 trillion (78.8% of all money funds), while Total Prime MMFs stand at $460.5 billion (16.3%). Tax Exempt MMFs total $138.1 billion, or 4.9%.
They explain, "Assets of retail money market funds increased by $12.23 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $10.72 billion to $614.91 billion, prime money market fund assets increased by $1.26 billion to $263.64 billion, and tax-exempt fund assets increased by $255 million to $130.89 billion." Retail assets, which retook the $1 trillion level this week, account for over a third of total assets, or 35.7%, and Government Retail assets make up 60.9% of all Retail MMFs.
The release adds, "Assets of institutional money market funds increased by $15.41 billion to $1.82 trillion. Among institutional funds, government money market fund assets increased by $13.73 billion to $1.61 trillion, prime money market fund assets increased by $1.41 billion to $196.84 billion, and tax-exempt fund assets increased by $264 million to $7.17 billion." Institutional assets account for 64.3% of all MMF assets, with Government Inst assets making up 88.8% of all Institutional MMFs.
In other news, our February Money Fund Intelligence also discussed recent asset trends in our update, "MF University '18 Highlights Asset Recovery, Rising Rates." We quote from this update here: Crane Data recently hosted its 8th annual Money Fund University, which took place Jan. 18-19 in Boston. The "basic training" event, targeted at those new to the money fund industry, featured primers on interest rates, money market securities, the Federal Reserve, ratings, portfolio management, and money fund regulations. The big themes this year were the reality of rising rates, the gradual recovery in assets, and the focus on repatriation and pending regulatory reform in Europe.
Host Peter Crane kicked off the event with a session called, "History and Current State of Money Funds," commenting, "As rates went to zero, assets went down by about 15% per year, then you see this 6-7 year period where assets were basically flat. It certainly was a minor miracle that money funds were able to keep the $2.6 trillion-2.7 trillion with virtually zero rates. Fund companies were waiving most of their fees ... to keep yields positive and that crushed the profits of money fund providers.... [But] they were able to soldier on and the money stayed put, which was a minor miracle."
He continued, "[Then] we saw an uptick in 2017, when assets increased by about 4%. This was the first bump up we've seen in almost 10 years, and 2018 looks even better, as yields are breaking 1.0%. There is a little bit of interest again in cash, so you came at a good time. You survived the 'death watch' and presumably things are brighter than they've been in a decade in this space."
J.P. Morgan Securities' Teresa Ho presented the session, "Instruments of the Money Markets," and reviewed the size of money market supply. She commented, "At its peak in early 2008, total money market supply was about $11.5 trillion. If you exclude Treasuries, credit supply ... at its peak was $9.5 trillion. Today, [it's] now $6 trillion dollars, which means in the past 10 years credit supply has come down $3.5 trillion."
She says, "Money funds are by far the largest investor in the money markets. They also have seen a dramatic shift ... over the past three years as a result of money fund reform.... We've seen increased participation from other investors coming in to fill the gap that was left behind by prime money funds. These other investors include securities lenders, short term bond funds, separately managed accounts, even offshore money funds."
Finally, Ho adds, "Money market funds are here to stay.... As long as there's demand a for liquidity, as long as there's a mismatch between the timing of receipts and expenditures, and cash inflows and outflows, money markets will continue to exist. Yes, we've had a lot of regulations that’s changed the structure of the money markets but [they] has evolved, and the markets have adapted."
Note: Next year's Money Fund University is tentatively scheduled for Jan. 24-25, 2019 in Stamford, Conn. The MFU'18 Powerpoints, recordings & binder are available to attendees and MFI subscribers via our "Content Center" (at the bottom).
Crane Data's latest Money Fund Market Share rankings show assets were mixed among U.S. money fund complexes in January. Money fund assets overall fell by $40.9 billion, or -1.4% last month, but assets have increased by $54.2 billion, or 1.9%, over the past 3 months. They've also increased by $271.0 billion, or 10.0%, over the past 12 months through January 31, 2018, but note that our asset totals have been inflated somewhat by the addition of a number of funds. (Crane Data added some previously untracked funds in February and April 2017.) The biggest gainers in January were Northern, whose MMFs rose by $5.4 billion, or 5.1%, State Street Global, whose MMFs rose by $3.7 billion, or 4.5%, and Invesco, whose MMFs rose by $3.4 billion, or 5.5%.
First American, UBS, Vanguard, T. Rowe Price, Wells Fargo and JPMorgan also saw assets increase in January, rising by $1.4B, $1.2B, $832M, $620M, $526M and $226M, respectively. Big declines among the 25 largest managers were seen by Morgan Stanley, Goldman Sachs, Dreyfus, Schwab, Federated, BlackRock, Fidelity and Western. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product. The combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.) We review these market share totals below, and we also look at money fund yields the past month, which continued higher in January.
Over the past year through Jan. 31, 2018, Fidelity (up $73.2B, or 14.7%), BlackRock (up $49.5B, or 20.4%), Dreyfus (up $24.4B, or 16.3%), Vanguard (up $24.3B, or 9.4%), T. Rowe Price (up $17.9B, or 112.0%) and Northern (up $14.9B, or 15.5%) were the largest gainers. These 1-year gainers were followed by Columbia (up $13.5B, or 1187.6%), Prudential (up $13.4B, or 2194.4%), JPMorgan (up $12.8B, or 5.3%) and Invesco (up $9.2B, or 16.5%).
BlackRock, Fidelity, Morgan Stanley, Northern, and Federated had the largest money fund asset increases over the past 3 months, rising by $20.5B, $14.8B, $8.3B, $8.2B, and $5.0B, respectively. The biggest decliners over 12 months include: Goldman Sachs (down $25.4B, or -13.2%), Morgan Stanley (down $9.6B, or -7.6%), Western (down $9.1B, or -25.6%), and Schwab (down $3.9B, or -2.4%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $572.7 billion, or 19.2% of all assets. It was down $3.1 billion in Jan., up $14.8 billion over 3 mos., and up $73.2B over 12 months. BlackRock remained in second with $291.8 billion, or 9.8% market share (down $5.1B, up $20.5B, and up $49.5B for the past 1-month, 3-mos. and 12-mos., respectively), while Vanguard remained in third with $283.4 billion, or 9.5% market share (up $832M, down $2.7B, and up $24.3B). JP Morgan ranked fourth with $253.6 billion, or 8.5% of assets (up $226M, up $1.7B, and up $13.0B for the past 1-month, 3-mos. and 12-mos., respectively), while Federated was ranked fifth with $195.8 billion, or 6.6% of assets (down $5.3B, up $5.0B, and up $8.4B).
Dreyfus was in sixth place with $174.0 billion, or 5.8% of assets (down $8.5B, down $3.1B, and up $24.4B), while Goldman Sachs was in seventh place with $166.3 billion, or 5.6% (down $13.3B, down $3.2B, and down $25.4B). Schwab ($155.7B, or 5.2%) was in eighth place, followed by Morgan Stanley in ninth place ($116.5B, or 3.9%) and Northern in tenth place ($111.1B, or 5.4%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Wells Fargo ($107.9B, or 3.6%), SSgA ($85.3B, or 2.9%), Invesco ($65.1B, or 2.2%), First American ($51.4B, or 1.7%), UBS ($44.1B, or 1.5%), T Rowe Price ($33.8B, or 1.1%), DFA ($27.0B, or 0.9%), Western ($26.5B, or 0.9%), Deutsche ($25.9B, or 0.9%), and Franklin ($19.2B, or 0.6%). The 11th through 20th ranked managers are the same as last month, except Northern moved ahead of Wells. Crane Data currently tracks 66 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except JPMorgan moves ahead of Vanguard, and Goldman Sachs moves ahead of Federated and Dreyfus. Our Global Money Fund Manager Rankings include the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore") products.
The largest Global money market fund families include: Fidelity ($581.8 billion), BlackRock ($430.8B), JP Morgan ($428.4B), Vanguard ($283.4B), and Goldman Sachs ($271.4B). Federated ($205.2B) was sixth and Dreyfus/BNY Mellon ($199.4B) was in seventh, followed by Schwab ($155.7B), Morgan Stanley ($155.6B), and Northern ($141.9B), which round out the top 10. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
The February issue of our Money Fund Intelligence and MFI XLS, with data as of 1/31/18, shows that yields were up again in January across all of our Crane Money Fund Indexes (except Tax Exempt). The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 760), was up 6 bps to 0.98% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 11 bps to 0.95%. The MFA's Gross 7-Day Yield increased 8 bps to 1.43%, while the Gross 30-Day Yield was up 11 bps to 1.38%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 1.17% (up 5 bps) and an average 30-Day Yield of 1.15% (up 12 bps). The Crane 100 shows a Gross 7-Day Yield of 1.45% (up 7 bps), and a Gross 30-Day Yield of 1.42% (up 11 bps). For the 12 month return through 1/31/18, our Crane MF Average returned 0.61% and our Crane 100 returned 0.79%. The total number of funds, including taxable and tax-exempt, was up 3 funds to 959. There are currently 760 taxable and 199 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 1.24% (up 6 bps) as of January 31, while the Crane Govt Inst Index was 1.05% (up 6 bps) and the Treasury Inst Index was 1.07% (up 5 bps). Thus, the spread between Prime funds and Treasury funds is 17 basis points, up 1 bp from last month, while the spread between Prime funds and Govt funds is 19 basis points, unchanged from last month. The Crane Prime Retail Index yielded 1.03% (up 6 bps), while the Govt Retail Index yielded 0.71% (up 8 bps) and the Treasury Retail Index was 0.78% (up 5 bps). After spiking in December, the Crane Tax Exempt MF Index yield fell back down to 0.67% (down 36 bps).
Gross 7-Day Yields for these indexes in January were: Prime Inst 1.63% (up 9 bps), Govt Inst 1.35% (up 7 bps), Treasury Inst 1.36% (up 6 bps), Prime Retail 1.60% (up 8 bps), Govt Retail 1.35% (up 12 bps), and Treasury Retail 1.36% (up 8 bps). The Crane Tax Exempt Index decreased 32 basis points to 1.20%. The Crane 100 MF Index returned on average 0.10% for 1-month, 0.26% for 3-month, 0.10% for YTD, 0.79% for 1-year, 0.36% for 3-years (annualized), 0.23% for 5-years, and 0.34% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The February issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Wednesday morning, features the articles: "Battle to Repeal Floating NAV Regs Not Over; H.R. 2319 Lives," which reviews the legislative effort to undo the floating NAV reforms; "Morgan Stanley's McMullen & Kolk on Global, Ultrashort," which interviews MSIM's Fred McMullen and Jonas Kolk; and, "MF University '18 Highlights Asset Recovery, Rising Rates," which reviews highlights from our recent "basic training" conference. We've also updated our Money Fund Wisdom database with Jan. 31, 2018, statistics, and also sent out our MFI XLS spreadsheet Wednesday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our February Money Fund Portfolio Holdings are scheduled to ship on Friday, February 10, and our February Bond Fund Intelligence is scheduled to go out Wednesday, February 15.
MFI's "Battle to Repeal" article says, "While recent press coverage indicates that it has stalled, the push continues to pass H.R. 2319, a bill that would bring back the $1.00 'stable' share price for Prime Institutional and Muni Inst MMFs. The most recent skirmish took place on the Editorial page of The Wall Street Journal. Bill sponsor Rep. Keith Rothfus (R., Pa.) wrote a letter to the editor in response to a recent editorial."
It continues, "His missive, entitled, "Keep Money-Market Funds Safe and Sensible," says, "The SEC unfairly picked winners and losers at the expense of state and local governments, affordable housing, schools, hospitals and Main Street businesses. Your editorial "The Next Money-Fund Bailout" (Jan. 29) omits key facts about my legislation as well as the effects of the SEC's 2014 rule affecting money-market funds. I agree that investors should be aware of the risks ... and that the federal government should not bail out failing businesses. That's why my bill prohibits federal bailouts and requires that this be disclosed."
MFI's latest Profile reads, "This month, MFI interviews Morgan Stanley Investment Management Managing Directors and Co-Heads of Global Liquidity Fred McMullen and Jonas Kolk. MSIM is the 5th largest manager of global institutional money funds, overseeing $169.0 billion. We discuss the latest issues involving U.S. money market funds, and also talk about pending European money fund reforms, the state of conservative ultra-short bond funds, and a number of other issues in the cash investment space. Our Q&A follows."
MFI says, "Tell us about your history." McMullen tells us, "The genesis of the business was designed for our brokerage and private wealth platforms. In the early 2000s, we made a push into the institutional funds market, both in the U.S. and offshore. Then for our ultrashort fund, which is approaching its two-year anniversary, that history coincides with the recent regulatory changes here in the U.S.... I joined Morgan Stanley in 2010 and took over the distribution and product functions in 2011. I've been in the industry approximately 30 years."
Kolk comments, "We launched our first money fund in 1975, so it was one of the first funds in existence in the industry.... I joined 14 years ago [and] was hired as someone with experience on the institutional side of portfolio management."
MFI asks, "What's your biggest priority now? McMullen says, "We have a lineup of U.S. institutional funds and retail funds in both the taxable and tax-exempt spaces, and we also have our offshore funds across three major currencies - U.S. dollar, euro and sterling. The money market funds are complemented by our Ultra Short Income Bond Fund [where] the AUM is a little over $7 billion.... We also manage liquidity separate accounts."
He adds, "I would say that EU money market fund reform is right on top of our priorities list, and where we're spending a lot of time engaging clients and firming up our product line decisions. On the offshore side, we've experienced a lot of growth.... [We're now] number six in the offshore league tables, so we want to preserve this part of the franchise as much as we can. In terms of our response to the EU regulations, we're finalizing what our product lineup will look like." (Watch for more excerpts from this "profile" later this month, or ask us to see the latest MFI.)
Our "Money Fund University" article says, "Crane Data recently hosted its 8th annual Money Fund University, which took place Jan. 18-19 in Boston. The "basic training" event, targeted at those new to the money fund industry, featured primers on interest rates, money market securities, the Federal Reserve, ratings, portfolio management, and money fund regulations. The big themes this year were the reality of rising rates, the gradual recovery in assets, and the focus on repatriation and pending regulatory reform in Europe."
It continues, "As always, host Peter Crane kicked off the event with a session called, "History and Current State of Money Funds," commenting, "As rates went to zero, assets went down by about 15% per year, then you see this 6-7 year period where assets were basically flat. It certainly was a minor miracle that money funds were able to keep the $2.6 trillion-2.7 trillion with virtually zero rates. Fund companies were waiving most of their fees ... to keep yields positive and that crushed the profits of money fund providers.... [But] they were able to soldier on and the money stayed put, which was a minor miracle."
The recap adds, "He continued, "[Then] we saw an uptick in 2017, when assets increased by about 4%. This was the first bump up we've seen in almost 10 years, and 2018 looks even better, as yields are breaking 1.0%. There is a little bit of interest again in cash, so you came at a good time. You survived the 'death watch' and presumably things are brighter than they've been in a decade in this space."
Our February MFI XLS, with Jan. 31, 2018, data, shows total assets decreased $54.3 billion in January to $2.988 trillion, after increasing $57.9 billion in December, $46.4 billion in November, and decreasing $2.2 billion in October. Our broad Crane Money Fund Average 7-Day Yield was up 6 basis points to 0.98% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 5 bps to 1.17%.
On a Gross Yield Basis (7-Day) (before expenses were taken out), the Crane MFA rose 8 bps to 1.43% and the Crane 100 rose 7 bps to 1.45%. Charged Expenses averaged 0.45% and 0.28% (up one bps and unchanged, respectively) for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA was 29 days (down one day from last month) and for the Crane 100 was 28 days (down two from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The Wall Street Journal writes "Asset Growth in the World's Largest Money-Market Fund Slows Sharply." The piece explains, "Asset growth in the world's largest money-market fund hit a plateau at the end of 2017, following a series of measures by the fund's manager to control its swelling size. The fund known as Yu'e Bao, whose name means "leftover treasure" in Mandarin, had assets of 1.58 trillion yuan ($251.2 billion) at the end of 2017, according to its manager, Tianhong Asset Management Co. While the fund was nearly twice its size from a year ago, it grew just 1% from the end of September, the data showed."
It continues, "Yu'e Bao is an online money-market fund that was started in 2013 as a way for users of popular Chinese payments network Alipay to earn returns on idle funds sitting in their virtual wallets. Its rich investment yields -- which topped 4% on an annualized basis at various points last year and hit a record of 6.8% in 2014 -- have drawn a flood of cash from investors. Yu'e Bao's rapid growth and scale, however, has worried Chinese regulators, which have suggested it is "systemically significant."
The Journal piece tells us, "China has around 400 money-market funds, whose assets totaled $1.07 trillion at the end of 2017, up 57% from a year earlier. The industry contracted for the first time in the fourth quarter, with assets shrinking 1% between September and December, according to data from the Asset Management Association of China."
It adds, "The association, an industry group supervised by the China Securities Regulatory Commission, late last year told fund-rating firms and some Chinese media outlets to stop publishing the sizes of money-market mutual funds in their reports and rankings. The push was seen as an attempt by regulators to slow the industry's growth and discourage investors from picking funds based on their size."
See also our "Link of the Day from last Thursday, "Ant's Yu'e Bao Put in Caps." It quotes the Reuters piece, "Ant Financial's money market fund imposes temporary caps for Lunar New Year," which says, "Ant Financial's money market fund will place a temporary daily cap on subscription volumes ahead of an expected surge in inflows during the Chinese Lunar New Year, as calls grow for tighter regulations of these funds to prevent systemic risks. The restrictions by Yu'e Bao - the world's largest money market fund - will be in place from Feb. 1 through Mar. 15, Ant Financial said in a statement.... Ant Financial said the caps were "voluntarily announced" by Tianhong Asset Management Co., Ltd., which manages the fund."
In other news, the Federal Reserve Bank of New York's "Liberty Street Economics" blog posted an article entitled, "A New Perspective on Low Interest Rates." It says, "Interest rates in the United States have remained at historically low levels for many years. This series of posts explores the forces behind the persistence of low rates. We briefly discuss some of the explanations advanced in the academic literature, and propose an alternative hypothesis that centers on the premium associated with safe and liquid assets. Our argument, outlined in a paper we presented at the Brookings Conference on Economic Activity last March, suggests that the increase in this premium since the late 1990s has been a key driver of the decline in the real return on U.S. Treasury securities."
It explains, "Recognizing that persistent low rates have important implications for fiscal and monetary policy, economists have put forward many explanations for the secular (long-term) decline in real interest rates. One of the most influential, proposed by Laubach and Williams, is that the decline is connected to the fall in the economy's potential growth rate. Others have emphasized the role of demographic factors, and in particular the aging of the population, which tends to increase desired saving and hence to depress real interest rates."
The Liberty Street blog tells us, "Intuitively, the fall in Treasury yields, and the corresponding increase in the securities' value, reflects a surging mismatch between the demand and supply of the safety and liquidity services provided by U.S. Treasuries. Since the late 1990s, with the acceleration in global financial flows and their re-direction toward safer uses following the Asian financial crisis, a rising tide of international saving has been chasing a limited supply of safe and liquid assets."
It adds, "Moreover, this supply has been further curtailed by the realization during the global financial crisis that many assets previously considered to be akin to Treasuries -- most notably the highly rated tranches of mortgage-backed securities -- were not so safe after all. The role of this shortage of safe assets has been recently explored by Ricardo Caballero and others (Caballero, Caballero and Farhi, and Gourinchas and Rey)."
Finally, they write, "Their view is also related to the saving glut hypothesis first proposed by Ben Bernanke. For instance, Bernanke and others provide evidence that from 2003 to 2007, foreign investors acquired substantial amounts of U.S. Treasuries, agency debt, and agency-sponsored mortgage-backed securities. In the words of Caballero (pp. 17–18), "There is a connection between the safe-assets imbalance and the more visible global imbalances: The latter were caused by the funding countries' demand for financial assets in excess of their ability to produce them, but this gap is particularly acute for safe assets since emerging markets have very limited institutional capability to produce them.""
We learned from ignites Europe that a new "European Commission Letter on Money Market Fund Regulation" appears to deny the fund industry's plea to allow "reverse exchange mechanisms" or "share cancellation" schemes (to deal with negative yields) once the new European money fund regulations go live later this year and in early 2019. The EC's release says, "The European Securities and Markets Authority (ESMA) has published a reply received on 19 January from the European Commission (EC). The letter is in response to ESMA's cover letter that accompanied the publication, in November 2017, of its final report on Technical advice, draft implementing technical standards and guidelines under the Money Market Fund (MMF) Regulation." (See our Nov. 24, 2017 News, "ESMA Final Report on EU Money Fund Rules Sheds More Light on Changes.")
It continues, "ESMA, in its cover letter, noted that the views of the Legal Service of the Commission had been sought on the compatibility of the practice of share cancellation, also known as reverse distribution or share destruction, with the MMF Regulation. On 19 January ESMA received the European Commission’s reply, which indicates that this practice is not compatible with the Regulation. ESMA is now assessing the consequences of the letter and considering possible next steps with a view to promoting convergent application of the Regulation across the EU."
The letter itself, on the Subject, "Implementation of the Money Market Fund Regulation," is from the EC's Directorate-General for Financial Stability, Financial Services and Capital Markets Union and addressed to Mr Steven Maijoor, Chairman of the European Securities and Markets Authority (ESMA). It states, "I would like to thank you for the draft implementing technical standards for the Money Market Fund (MMF) Regulation that we received 13 November last year. To ensure proper implementation of the MMF Regulation, it will be important to achieve supervisory convergence between the different approaches currently taken in Member States. The MMF Regulation has been introduced in order to preserve the integrity and stability of the internal market. The Regulation is intended to make MMFs more resilient and limit contagion channels. Uniform rules and supervisory practice across the Union are necessary to ensure that MMFs are able to honour redemption requests from investors and to enhance financial stability."
It explains, "This is why the MMF Regulation fully harmonises the activities and models of MMFs and limits them to only three types of MMFs with specific safeguards. In consequence, based on your mandate to ensure supervisory convergence, it is important that those safeguards should not be rendered inapplicable by the continued use of practises that are not in line with the Regulation."
Finally, EC Director General Olivier Guersent writes, "Regarding the question that you raised in your cover letter on the use of the reverse distribution mechanism (RDM, often referred to as 'share cancellation' or 'share destruction’) under the MMF Regulation and the need to have legal clarity, our analysis confirms the view expressed by ESMA in their public consultation that this mechanism is not compatible with the MMF Regulation. In consequence, in the light of the current divergent practices in Member States before the application date of the MMF Regulation, we share the view expressed in your letter that ESMA should take action to ensure the consistent, efficient and effective application of the MMF regulation. To that end, ESMA could provide guidance to market participants to secure converging supervisory approaches."
In response to an inquiry from ignites Europe, Crane Data's Peter Crane wrote, "It looks like, unless this opinion is overturned or altered, it could be the kiss of death for the bulk of the E90.8 billion in Euro denominated money funds registered in Ireland and Luxembourg. These funds would likely have to convert to variable NAV funds, which are unpopular with institutional investors, or they would have to wait until short-term Euro interest rates move solidly out of negative territory. Most France-domiciled funds won't be impacted because they are already variable NAV funds (and primarily retail). US dollar-denominated and GBP (sterling) denominated funds, which make up the lion's share of Ireland and Luxembourg's money fund assets, won't be impacted because these offer positive yields and don't have to worry about negative yields "eroding" their NAVs. (Reverse exchange mechanisms or share destruction schemes were created to prevent the NAV from eroding. They would take fees from shares instead of from NAVs.)"
For more on pending European Money Fund Reforms, see our Jan. 25, 2018 News, "U.K.'s FCA Posts Paper on European MMF Regulations;" our Oct. 5, 2017 News, "European Money Fund Symposium II: French MF Update; VNAV, Standard;" our Oct. 4, 2017 News, "European MFS Recap: IMMFA's Lowe Says EU Reform Finish Line in Sight;" and our Aug. 23, 2017 News, "Dillon Eustace Reviews European Money Market Reforms; Disclosures." (Note: Crane Data's next European Money Fund Symposium is scheduled for Sept. 20-21, 2018, in London.)
In other news, the Association for Financial Professionals (AFP) published its latest "AFP Corporate Cash Indicators" late last month. Its "January 2018 Results" state, "Fourth quarter results of AFP's Corporate Cash Indicators (CCI) report that businesses continued to accumulate cash and short-term investment holdings, but at a lesser pace than the previous quarter. Treasury and finance professionals continue to be skeptical about the economy but are showing some signs of optimism. Business leaders anticipate that there will be some cash deployment in the first quarter of 2018."
The update explains, "The indicators measure recent and anticipated changes in corporate cash balances by calculating the percentage of survey respondents reporting an increase (or expected increase) in cash holdings minus the percentage reporting a decline (or expected decline). Declining indicators are indicative of increasingly confident businesses. Conversely, rising indicators suggest growing pessimism."
Finally, AFP asks, "Why you should care about corporate cash holdings and the AFP Corporate Cash Indicators?" They tell us, "The reason is simple: all other things held constant, optimistic companies are more likely to deploy their cash holdings. Confident companies use their cash to make growth-orientated expenditures (e.g., increased capital expenditures, merger & acquisitions and hiring) and to increase dividend payouts and share repurchases. Conversely, pessimistic executives are likely to retain their cash holdings."
Money fund assets plunged at month-end and ended January down sharply, according to the Investment Company Institute's latest "Money Market Fund Assets" report. After rising by $113 billion, or 4.1%, in 2017, money fund assets have declined by $43 billion, or -1.5%, year-to-date in 2018 (through 1/31). This should come as no surprise since money funds have averaged outflows of $37 billion in January over the previous 3 years (January and March have been the weakest month seasonally over the past five years). We review ICI's latest asset totals, as well as a couple publications on "repatriation," below.
ICI writes, "Total money market fund assets decreased by $25.39 billion to $2.80 trillion for the week ended Wednesday, January 31, the Investment Company Institute reported today. Among taxable money market funds, government funds2 decreased by $19.70 billion and prime funds decreased by $5.45 billion. Tax-exempt money market funds decreased by $231 million." Total Government MMF assets, which include Treasury funds too, stand at $2.204 trillion (78.7% of all money funds), while Total Prime MMFs stand at $457.8 billion (16.4%). Tax Exempt MMFs total $137.5 billion, or 4.9%.
They explain, "Assets of retail money market funds decreased by $4.33 billion to $997.22 billion. Among retail funds, government money market fund assets decreased by $2.14 billion to $604.19 billion, prime money market fund assets decreased by $1.60 billion to $262.38 billion, and tax-exempt fund assets decreased by $592 million to $130.64 billion." Retail assets account for over a third of total assets, or 35.6%, and Government Retail assets make up 60.6% of all Retail MMFs.
The release adds, "Assets of institutional money market funds decreased by $21.05 billion to $1.80 trillion. Among institutional funds, government money market fund assets decreased by $17.56 billion to $1.60 trillion, prime money market fund assets decreased by $3.85 billion to $195.44 billion, and tax-exempt fund assets increased by $361 million to $6.90 billion." Institutional assets account for 64.4% of all MMF assets, with Government Inst assets making up 88.8% of all Institutional MMFs.
In other news, Wells Fargo Securities published a recent "Short-Term Market Strategy" report entitled, "Reinvesting Repatriation," which explains, "As implementation of the Tax Cuts and Jobs Act (TJCA) is being discussed at Fortune 500 companies, conversations are being had on the investment implications for one aspect of tax reform, notably repatriation. Under the new tax guidelines, the IRS is introducing a Transition Tax/Deemed Repatriation on accumulated pre-2018 earnings at a rate of 15.5% for earnings in cash positions, and at 8% for all other earnings. The tax on repatriated earnings will be payable in lump sum or installments over the next eight years. Going forward, earnings generated outside the United States will be taxed at rates prevalent in foreign jurisdictions, not after they are brought back to the United States. The formal term for this new tax system is a "modified territorial" system, versus the previous "worldwide" system wherein the U.S. taxed global income only after it was brought on shore."
Authors Garret Sloan and Vanessa Hubbard tell us, "By comparison, the 2004 tax holiday was used opportunistically by corporations to quickly bring overseas earnings back to the United States at an effective tax rate of 3.7 percent. The window of opportunity provided by the 2004 tax holiday was narrow, and most businesses considered the event to be unique. Consequently, companies had little incentive to fundamentally change capital plans, and repatriated earnings largely went towards shareholder-friendly activities."
They state, "Fast forward 13 years and we see the 2017 tax reform less in terms of a tax holiday and more like a permanent change to the tax system. As such, the immediate need to “do something” quickly with the cash may be less prevalent this time around. While certain companies have already announced their intention to reinvest repatriated earnings, we believe that the permanent changes to the tax system may extend the reinvestment timeframe relative to 2004."
Wells adds, "In addition to the lengthier reinvestment period, the dollar value of repatriated earnings is likely to be much higher this time around, with an estimated $2.5 trillion in accumulated offshore earnings." As a result, conversations on portfolio investment for the period between repatriation and final cash deployment are materially important for short-term markets and individual investors alike…. Despite this massive number, our opinion is that repatriation’s impact on fixed-income markets will feel less like a blowout and more like a slow leak. The potential for an incremental rise in yields is real given the potential dollar amount, but the fact that all accumulated offshore earnings are subject to taxation suggests that decisions for redeployment may be drawn out, potentially softening the impact on short-term fixed-income markets."
Credit Suisse's Zoltan Posnar also recently commented on the subject in "Repatriation, the Echo-Taper and the E/$ Basis." He writes, "The view that the repatriation of U.S. corporations' offshore cash balances will lead to a stronger U.S. dollar and tighter money markets is wrong, in our opinion. It is wrong because offshore cash balances are in U.S. dollars already and are invested mostly in one to five-year U.S. Treasuries and term debt issued by banks.... Offshore balances were invested in the money market a decade ago, but as they grew, corporate treasurers added more risk. Corporate cash pools became corporate bond portfolios."
He continues, "You don't run trillions the way you run billions: size forces you to diversify.... In our discourse about corporate tax reform, we should replace the concepts of “cash balances” with “bond portfolios” and “repatriation” with “distribution”. Cash balances are not hallmarks of an era where corporations are net providers of funding -- where firms have positive operating cash flows and need to invest their surplus cash. If surplus cash accumulates faster than the need for long-term capital outlays, it tends to gravitate toward the bond market, not the money market."
State Street Global Advisors published its "Global Cash Outlook 2018" last week, which is subtitled, "Cash Investment Prospects in a Shifting Rate Environment." Global Head of Cash Management Pia McCusker says in the paper's introduction, "As 2018 gets under way, cash investors are likely to see a continuation of the trends that developed through the past year.... For cash investors that have been subject to record low, and even negative, returns in recent years, any upward pressure on short-term rates would be viewed as a welcome development. Once again, it is clear that the US Federal Reserve (Fed) is going to be the pace-setter with three rate hikes penciled in for 2018.... Cash market participants in Europe will be contemplating European money market reform, although most of that reform would largely affect US assets. Cash investors will likely continue to experience frustration as they seek to maintain principal in a negative yield environment."
Following a macro-economic update, the paper addresses regulations, explaining, "Today's cash investor operates in an environment that has seen considerable regulatory change in recent times. Money market fund reform in the United States transformed the US money market landscape when implemented in 2016, and this coming year will see European regulations finally begin to be implemented. Europe's experience will be different from that of the US given their respective starting points, and the contrasting nature of these markets. Specifically, the massive US investor switch from prime funds to government funds is unlikely to be replicated in Europe, not least because of the negative returns that are typically on offer from sovereign paper."
It continues, "The underlying purpose of the EU reforms is the same as that in the US though: to help protect smaller fund shareholders in the event of large cash withdrawals during periods of heightened volatility.... Although less transformational than the reforms rolled out in the US, investors will still need to make important decisions ahead of the deadlines. At SSGA, we will continue to offer a comprehensive range of fund options and are always ready to help our clients find the most appropriate solution." Following the reforms, European fund options will include: Low Volatility NAV, Public Debt Constant NAV, Short-Term Variable NAV, and Standard VNAV money funds.
The paper's "Capital Markets Outlook" section tells us, "For cash investors, the markets in which they operate are undergoing change. Some of this is incremental and reflects a natural evolution of financial markets in reaction to economic and policy changes. Others are more far-reaching in nature, with implications for investment choice. In the United States, potential adjustments to Treasury supply volume and duration is significant, as is the Fed's acceleration in the reduction of its balance sheet. How the debt ceiling negotiation is managed early in 2018 is important with additional supply a likely outcome at the end of the process. In Europe, change is also on the horizon amid regulatory changes and a slowing pace of central bank asset purchases; but for short-term investors, conditions are unlikely to change much as negative yields seem set to hold sway."
SSGA writes, "In the near term, the US will once again be dealing with a debt ceiling limit. While all previous debates have concluded with a resolution, there is still the potential for a technical default of a US treasury bill. We should stress that this is not our base case. We see it as an extremely remote scenario, but it nags at the consistency of US Treasury bill issuance and how the US Treasury manages its excess cash. In 2018, consensus estimates indicate an additional US$430 billion of new Treasury bill supply."
The paper tells us, "US money market credit spreads had a nice recovery in 2017.... However, the significant decrease in money market prime assets ultimately limited the extent of the recovery in credit spreads. By the middle of 2017, the tightening had halted and remained stable through to the end of the year. It's anticipated that credit spreads will remain range-bound through 2018, barring any macro-economic shocks; we would expect the yield spread between the prime money market fund and the government money market fund to remain within its current range (25-30 basis points). For the most part, it appears that prime funds have 'normalised' their duration and liquidity metrics. We don't expect a substantial shift in liquidity, holdings or duration given our forecast."
Finally, it states, "Sourcing short-term debt at a reasonable price continues to be a challenge for European money markets. The repo markets have experienced significant dislocations around the end of every quarter and the year-end as a result of dealers withdrawing offerings and market liquidity freezing up. The ECB has reportedly considered implementing programs that would be similar to the US Federal Reserve's Reverse Repo Program, but complexity around such activity persists. It seems more likely that the ECB would probably issue some type of short-term unsecured debt by the ECB to mop up excess liquidity in those periods. This will become more critical when the ECB ultimately decides it is time to raise interest rates, something we don't anticipate occurring until 2019 at the earliest."
In other news, yesterday's Wall Street Journal featured an article entitled, "House Money-Fund Bill Hits a Snag," which explains, "A legislative effort to relax post-crisis money-fund rules has hit a snag and is unlikely to come to the House floor in its current form, according to GOP aides. The bill, which passed the House Financial Services Committee in a 34-21 vote this month, won't advance to the floor without alterations designed to attract more support, the aides said. "The bill is not in a form where it can pass through the House," according to one aide."
The Journal piece continues, "The legislation aims to scrap a 2014 Securities and Exchange Commission requirement that forced certain money-fund shares to fluctuate in value, rather than always remaining at $1.... The measure has drawn behind-the-scenes pushback from large fund managers such as BlackRock Inc. and Fidelity Investments. It is backed by Federated Investors Inc., a midsize, Pittsburgh-based company with nearly 70% of its assets in money funds. Spokesmen for Federated didn't respond to a request for comment. Opponents say the market has already adjusted to the 2014 requirement and are reluctant to force the SEC to revise it, worried about reopening a bruising fight over the funds' structure that could take years."
It adds, "Despite enough bipartisan to advance the bill out of the financial-services panel, five Republicans voted against it, including Reps. Bill Huizenga of Michigan and Sean Duffy of Wisconsin, who head two of the panel's subcommittees. The panel's chairman, Rep. Jeb Hensarling (R., Texas), voted for the measure but said he had reservations about it. House aides said lawmakers are working on making changes to aspects of the bill and might take up a modified version later this year, though they declined to say how it might be altered."
Finally, the Journal writes, "Opponents of the legislation also warn that reversing the rules could invite future scrutiny of the industry from the Financial Stability Oversight Council, a government panel that has the authority to target specific firms for tougher oversight from the Federal Reserve, according to a memo from the Investment Company Institute trade group reviewed by The Wall Street Journal. The Fed has long sought tougher curbs on money funds and its officials generally backed the 2014 requirement." (See also a recent Brookings Institution blog post.)
